Companies with favorable efficiency levels are likely to be on investors’ radar irrespective of market conditions. This is because efficiency is the ability to transform inputs into outputs, which is a potential indicator of a company’s financial health.
Moreover, a company with a favorable efficiency level is expected to provide impressive returns as it is believed to be positively correlated with its price performance.However, at times it becomes difficult to measure the efficiency level of a company. This is the reason why one must consider popular efficiency ratios while selecting stocks. These efficiency ratios are:
Operating Margin: This efficiency measure is the ratio of operating income over the past 12 months to sales over the same period. It measures a company’s ability to control operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers. Asset Utilization: This ratio indicates a company’s capability to convert assets into output and is thus a widely known measure of efficiency level. It is calculated by dividing total sales over the past 12 months by the last four-quarter average of total assets. Like the above ratios, high asset utilization may indicate that a company is efficient. Inventory Turnover: The ratio of 12-month cost of goods sold (COGS) to a four-quarter average inventory is considered one of the most popular efficiency ratios. It indicates a company’s ability to maintain a suitable inventory position. While a high value indicates that the company has a relatively low level of inventory compared to COGS, a low value indicates that the company is facing declining sales, which resulted in excess inventory. Receivables Turnover: This is the ratio of 12-month sales to four-quarter average receivables. It shows a company’s potential to extend its credit and collect debt in terms of that credit. A high receivables turnover ratio or the “accounts receivable turnover ratio” or “debtor’s turnover ratio” is desirable as it shows that the company is capable of collecting its accounts receivables or that it has quality customers. The Winning Strategy
In addition to the above-mentioned ratios, we have added a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) — to the screen with an objective to make this strategy more profitable. You can see the complete list of today’s Zacks #1 Rank stocks here.
Operating Margin, Asset Utilization, Inventory Turnover and Receivables Turnover greater than industry average.
(Values of these ratios higher than industry averages may indicate that the efficiency level of the company is higher than its peers.)
The use of these few criteria narrowed down the universe of more than 7,906 stocks to 13.
Here are the top five stocks that made it through the screen:
Delta Apparel, Inc. ( DLA Quick Quote DLA - Free Report) is a vertical manufacturer of knitwear products for the entire family.It has an average four-quarter earnings surprise of 140.3%. Quanex Building Products Corporation ( NX Quick Quote NX - Free Report) is an industry-leading manufacturer of components sold to Original Equipment Manufacturers in building products industry. It has an average four-quarter earnings surprise of 55.8%. Qorvo, Inc. ( QRVO Quick Quote QRVO - Free Report) is a leading provider of core technologies and radio frequency (RF) solutions for mobile, infrastructure and aerospace/defense applications. It has an average four-quarter earnings surprise of 20.2%. Financial Institutions, Inc. ( FISI Quick Quote FISI - Free Report) is a bank holding company that provides a wide range of consumer and commercial banking services and products to individuals, municipalities and small and medium size businesses, including agribusiness. It has an average four-quarter earnings surprise of 50.9%. United Bankshares, Inc. ( UBSI Quick Quote UBSI - Free Report) is a bank holding company whose business is the operation of its bank subsidiaries. It has an average four-quarter earnings surprise of 12.6%.
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