Companies that possess a favorable efficiency level relatively provide stellar returns as it is believed to be positively correlated with price performance. Efficiency level, in fact, measures a company’s capability to transform available input into output.
But, 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:
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. 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. 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) — 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. 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 more than 7,906 stocks to 28.
Here are the top five stocks that made it through the screen:
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. It has an average four-quarter earnings surprise of 16%. Smith & Wesson Brands, Inc. ( SWBI Quick Quote SWBI - Free Report) designs, manufactures and sells firearms. It has an average four-quarter earnings surprise of 58.9%. Encore Wire Corporation ( WIRE Quick Quote WIRE - Free Report) is a low-cost manufacturer of copper electrical building wires and cables. It has an average four-quarter earnings surprise of 230.1%. Cavco Industries, Inc. ( CVCO Quick Quote CVCO - Free Report) designs and produces factory-built housing products, primarily distributed through a network of independent and company-owned retailers. It has an average four-quarter earnings surprise of 29.5%. Apple Inc. ( AAPL Quick Quote AAPL - Free Report) designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. It has an average four-quarter earnings surprise of 23.7%.
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Click here to sign up for a free trial to the Research Wizard today. 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