A company with favorable liquidity has the potential to provide higher returns as liquidity supports the company’s growth endeavors.
Liquidity indicates a company’s ability to meet short-term debt obligations by converting assets into liquid cash and equivalents. However, one should be careful enough before investing in such stocks. While a high liquidity level may suggest that the company is clearing its dues at a faster rate compared with peers, it may also imply that it is failing to use its assets competently. Therefore, it is prudent to consider a company’s efficiency level along with liquidity to identify potential 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 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 indicate that the company 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 the current assets relative to current liabilities. Like the current ratio, a quick ratio of more than 1 is desirable. Cash Ratio: This is the most conservative ratio among the three, as it takes into account cash and cash equivalents as well as invested funds relative to current liabilities. It measures a company’s ability to meet 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. Screening Parameters
In order to pick the best of the lot, we have added asset utilization — a widely-used measure of a company’s efficiency — as one of the screening criteria. Asset utilization is the ratio of total sales in 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 11 Here are five of the 11 stocks that qualified the screen: Headquartered in New Albany, OH, Abercrombie & Fitch ( ANF Quick Quote ANF - Free Report) is a specialty retailer of premium, high-quality casual apparel for men, women and kids. The company conducts its business through a network of around 850 stores across North America, Asia, Europe and the Middle East. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $4.40 per share, up 33.3% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 510.9%, on average. St. Louis, MO-based Arch Resources ( ARCH Quick Quote ARCH - Free Report) is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The locations of its mines and access to export facilities enable the company to ship coal worldwide. During the year ended Dec 31, 2020, it sold nearly 63 million tons of coal, including 0.9 million tons purchased from third parties. The Zacks Consensus Estimate for 2021 earnings is pegged at $13.15 per share, up 145.8% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 5.4%, on average. Headquartered in Norwalk, CT, Terex Corporation ( TEX Quick Quote TEX - Free Report) is a global manufacturer of aerial work platforms, materials processing machinery and cranes. It designs, builds and supports products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. The company’s manufacturing facilities are located in the United States, Canada, Europe, Australia, Asia and South America. The Zacks Consensus Estimate for 2021 earnings is pegged at $3.00 per share, up 17.2% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 307.3%, on average. Dublin, CA-based TriNet Group ( TNET Quick Quote TNET - Free Report) offers wide-ranging human resources solutions primarily for small to medium-sized businesses (SMBs). It offers human capital expertise, risk mitigation and compliance, payroll and real-time technology to SMBs in various verticals like architecture and engineering, consulting, life sciences, marketing and advertising, technology, retail and wholesale, among others. The Zacks Consensus Estimate for 2021 earnings is pegged at $4.66 per share, up 21% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 96.8%, on average. Based in Santa Barbara, CA, Sonos ( SONO Quick Quote SONO - Free Report) is a consumer electronics company. It is primarily involved in the manufacturing of smart speakers with immersive sound experience. The company leverages evolving consumer technology and entertainment trends to meet the audio consumption patterns of customers that is largely characterized by fast-tracked adoption of voice assistants and streaming services. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $1.11 per share, up 30.6% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 297.3%, on average. Get the remaining stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software. The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out. 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.