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. 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. Following are the efficiency ratios:
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. 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. The Winning Strategy
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.
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 43.
Here are the top three stocks that made it through the screen:
Becton, Dickinson and Company ( BDX Quick Quote BDX - Free Report) is a medical technology company engaged principally in developing, manufacturing, and selling medical devices, instrument systems, and reagents. The company holds a Zacks Rank #2. It has an average four-quarter earnings surprise of 18.2%. Ternium S.A. ( TX Quick Quote TX - Free Report) is the leading producer of flat and long steel products of Latin America and consolidates the operations of the steel companies Hylsa in Mexico, Siderar in Argentina and Sidor in Venezuela. The company holds a Zacks Rank #2. It has an average four-quarter positive earnings surprise of 77.1%. AutoNation, Inc. ( AN Quick Quote AN - Free Report) is the largest automotive retailer in the United States. The company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. The company holds a Zacks Rank #1. It has an average four-quarter positive earnings surprise of 40.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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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