A company with a favorable efficiency level is expected to provide stellar returns as it is believed to be positively correlated with price performance. In fact, efficiency level measures 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 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. 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 53.
Here are the top four 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 219.6%. The stock carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. MEDIFAST INC ( MED Quick Quote MED - Free Report) is in the health and wellness space. It has become a remarkable direct-selling company in the industry. It has an average four-quarter earnings surprise of 12.7%. The stock has a Zacks Rank #1. Golden Entertainment, Inc. ( GDEN Quick Quote GDEN - Free Report) is a diverse gaming company which offers casino, distribute gaming and lottery services. It has an average four-quarter earnings surprise of 79.4%. The stock carries a Zacks Rank #2. Herbalife LTD. ( HLF Quick Quote HLF - Free Report) is a global network marketing company offering a range of science-based weight management products, nutritional supplements and personal care products. It has an average four-quarter earnings surprise of 12.2%. The stock has a Zacks Rank #2.
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