Building a portfolio comprising stocks with favorable liquidity is the way to go for investors seeking healthy returns.
Liquidity is a measure of a company’s capability to meet its short-term debt obligations. Thus, companies boasting impressive liquidity positions may be considered to have solid financial health.
However, one should be careful about investing in a stock with high liquidity level as it may also indicate that the company is failing to utilize assets efficiently.
Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to one’s portfolio.
Measures to Identify Liquid Stocks
Current Ratio: It measures current assets relative to current liabilities. This ratio is used for measuring a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio — also known as working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered ideal.
Quick Ratio: Unlike current ratio, quick ratio — also called “acid-test ratio" or "quick assets ratio" — indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.
Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It measures a company’s ability to meet its current debt obligations using the most liquid of assets. Though a cash ratio of more than 1 may point to sound financials, a higher number may indicate inefficiency in cash utilization.
So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.
In order to pick the best of the lot, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is the ratio of total sales over the past 12 months to the last four-quarter average of total assets. Though this ratio varies across industries, companies with a ratio higher than their respective industries can be considered efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential, we have added our proprietary Growth Style Score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios of greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization greater than industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks Rank equal to #1 (Only Strong Buy-rated stocks can get through). You can see the complete list of today’s Zacks #1 Rank stocks here.
Growth Score less than or equal to B (Back-tested results show that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 handily beat other stocks.)
These criteria have narrowed down the universe of more than 7,700 stocks to only eight.
Here are four of the eight stocks that qualified the screen:
Based in San Jose, CA, A10 Networks, Inc. (ATEN - Free Report) provides software-based application networking solutions, which enable enterprises, service providers, Web giants, and government organizations to enhance, secure, and optimize performance of their data center applications and networks. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 33.3% to 28 cents in the past 30 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 38.84%, on average.
Headquartered in North Reading, MA, Teradyne, Inc. (TER - Free Report) is a leading provider of automated test equipment. The company is primarily focused on the semiconductor test market, which generates the bulk of its revenues. It also provides specialized system testing equipment for specific end markets. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 25.6% over the past 30 days to $3.87 per share. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 16.39%, on average.
Domiciled in Ann Arbor, MI, Domino’s Pizza Inc. (DPZ - Free Report) delivers pizzas under the Domino’s Pizza brand, which is a top player in the Quick-Service Restaurant or QSR Pizza category. Through its subsidiaries, the company operates as a pizza delivery company in the United States and internationally. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 10.8% over the past 30 days to $12.54 per share. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 18.57%, on average.
Switzerland-based Logitech International S.A. (LOGI - Free Report) is a global leader in peripherals for personal computers and other digital platforms that develops and markets innovative products in PC navigation, Internet communications, digital music, home-entertainment control, video security, interactive gaming and wireless devices. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 10.6% over the past 30 days to $2.50 per share. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 24.05%, on average.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.