Liquidity of a stock is an important parameter that many investors tend to ignore. It primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents.
These stocks have always been in demand owing to their potential to provide maximum returns. However, one should be alert enough before investing in such stocks. While a high liquidity level may imply that the company is clearing its dues at a faster rate compared with peers, it may also indicate that the company is failing to use its assets efficiently
Hence, one may consider a company’s efficiency level in addition to its liquidity for identifying prospective winners.
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 nine.
Here are four of the nine stocks that qualified the screen:
Baltimore, MD-based, Medifast, Inc. (MED - Free Report) manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products. The Zacks Consensus Estimate for current-year earnings has been revised upward by 20.8% over the last 30 days to $8.78 per share. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 15.8%, on average.
Domiciled in Denver, CO, ANGI Homeservices Inc. (ANGI - Free Report) offers a digital marketplace for home services and enables consumers to connect with home service professionals in the United States and internationally. The Zacks Consensus Estimate for 2020 bottom line has narrowed to a loss of 3 cents from a loss of 7 cents in the past 30 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 66.67%, on average.
Headquartered in Seattle WA, Expeditors International of Washington Inc. (EXPD - Free Report) is a leading third-party logistics (3PL) provider. The company is engaged in the business of global logistics management including international freight forwarding and consolidation for both air and ocean freight. The Zacks Consensus Estimate for current-year earnings has been revised upward by 15.5% to $3.50 in the past 30 days. The company has a Growth Score of B. It has a trailing four-quarter earnings surprise of 18.26%, on average.
Provo, UT-based, Nu Skin Enterprises, Inc. (NUS - Free Report) develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. While the company specializes in beauty and personal care, it also provides a wide range of nutritional products. The Zacks Consensus Estimate for current-year earnings has been revised upward by 24.4% to $3.01 in the past 30 days. The company has a Growth Score of B. It has a trailing four-quarter earnings surprise of 18.71%, on average.
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