Liquidity indicates a company’s capability to meet debt obligations by converting its assets into liquid cash and equivalents.
A company with adequate liquidity always has the potential to deliver higher returns as stable financial resources can drive business growth.
However, one should be careful about investing in a stock with a high liquidity level. High liquidity may also indicate that the company cannot utilize its assets competently.
Besides having sufficient cash in hand, an investor might also consider a company’s capital deployment abilities before investing in the stock. A healthy company with favorable liquidity may prove to be a profitable pick for one’s portfolio.
Measures to Identify Liquid Stocks Current Ratio: It measures current assets relative to current liabilities. The ratio gauges a company’s potential to meet short- and long-term debt obligations. A current ratio — also known as the working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always suggest that the company is in good financial shape. It may also suggest that the firm failed to utilize its assets significantly. Hence, a range of 1-3 is considered ideal. Quick Ratio: Unlike the current ratio, the quick ratio — also called the ‘acid-test ratio’ or the ‘quick assets ratio’ — reflects 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, considering cash and cash equivalents and invested funds relative to current liabilities. It measures a company’s ability to meet current debt obligations using the most liquid assets. Though a cash ratio of more than 1 may suggest sound financials, a higher number may indicate inefficiency in cash utilization.
A ratio greater than 1 is always desirable but may not always represent a company’s financial condition.
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.
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 greater than 1 are desirable, significantly high ratios may indicate inefficiency.) Asset utilization greater than the 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 the universe of more than 7,700 stocks to only 8.
Here are four of the eight stocks that qualified for the screen:
Oxford Industries ( OXM Quick Quote OXM - Free Report) is an apparel company, which designs, sources, markets and distributes products bearing the trademarks of its owned and licensed brands. Oxford's brands include Tommy Bahama, Johnny Was, Duck Head, Lilly Pulitzer, Southern Tide, and The Beaufort Bonnet Company. The company has granted licenses to select third parties to produce and sell certain product categories under its Lilly Pulitzer and Tommy Bahama brands. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $10.48 per share, up 6.2% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 91.1%, on average. Service Properties Trust ( SVC Quick Quote SVC - Free Report) is a real estate investment trust which buys, owns and leases hotels primarily in the United States. The company had 247 hotels with over 41,000 guest rooms throughout the United States and in Puerto Rico and Canada and owned 775 retail service-focused net lease properties totaling over 13 million square feet across the United States as of Jun 30, 2022. The company is managed by The RMR Group, which is an alternative asset management company with more than $37 billion in assets under management as of Jun 30, 2022. The Zacks Consensus Estimate for 2022 earnings increased 27.4 % to $1.35 per share in the past 60 days. SVC has a Growth Score of B. Pure Storage ( PSTG Quick Quote PSTG - Free Report) provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Pure Storage’s performance is driven by momentum in subscription services’ revenues and revenue growth in the domestic and international segments. Subscription services’ revenues benefit from the robust adoption of Evergreen subscription services and synergies from the Portworx acquisition. Strength in FlashArray and FlashBlade businesses and strong growth prospects in data-driven markets of Artificial Intelligence (AI) and machine learning (ML) bode well. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $1.18 per share, up 24.2% in the past 60 days. PSTG has a Growth Score of A and a trailing four-quarter earnings surprise of 171.8%, on average.
Globant S.A. ( GLOB Quick Quote GLOB - Free Report) is a software solutions company that provides content management systems and e-commerce applications. The company provides data management solutions, quality assurance engagement strategy, mobile testing, test automation, load and performance testing and game testing services. The Zacks Consensus Estimate for 2022 earnings is pegged at $5.04 per share, up 1.2% in the past 60 days. GLOB has a Growth Score of B and a trailing four-quarter earnings surprise of 3.2%, on average.
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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.