A company with a promising efficiency level is likely to provide stellar returns as it is believed to be positively correlated with price performance. So, what is efficiency level? It is the measure of a company’s capability to transform available input into output and is often considered an important parameter for gauging a company’s potential to make profits.
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:
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 shows 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. 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. 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. Screening Criteria
In addition to the above-mentioned ratios, we have added a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) or 2 (Buy) — to the screen with an objective to make this strategy more profitable.
Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin 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 over 7,906 stocks to 64.
Here are the top five stocks that made it through the screen:
Crocs, Inc. ( CROX Quick Quote CROX - Free Report) is one of the leading footwear brands, with focus on comfort and style. It has an average four-quarter earnings surprise of nearly 194%. The stock carries a Zacks Rank #2. MEDIFAST INC ( MED Quick Quote MED - Free Report) manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products in the United States and the Asia-Pacific. It has an average four-quarter earnings surprise of 17.4%. The stock carries a Zacks Rank #2. Sprouts Farmers Market, Inc. ( SFM Quick Quote SFM - Free Report) provides fresh, natural, and organic food products in the United States. It has an average four-quarter earnings surprise of 49.1%. The stock carries a Zacks Rank #2. Meridian Bioscience Inc. ( VIVO Quick Quote VIVO - Free Report) is a fully-integrated life science company that manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and biopharmaceutical enabling technologies that help deliver answers. It has an average four-quarter earnings surprise of 101.8%. The stock carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. iRobot Corporation ( IRBT Quick Quote IRBT - Free Report) is one of the leading manufacturers of robots worldwide. It has an average four-quarter earnings surprise of 228.2%. The stock carries a Zacks Rank #1.
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