The 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. A company with a favorable efficiency level is expected to provide stellar returns as it is believed to be positively correlated with price performance.
However, at times it becomes difficult to measure the efficiency level of a company. This is 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. 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. 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. 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 the 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 19.
Here are the top four stocks that made it through the screen:
TravelCenters of America ( TA Quick Quote TA - Free Report) is a full-service national travel center chain in the United States. TravelCenters of America has an average four-quarter earnings surprise of 1,706.8%. HF Sinclair ( DINO Quick Quote DINO - Free Report) is an energy company, which produces and markets light products such as gasoline, diesel fuel, jet fuel, renewable diesel and other specialty products. HF Sinclair has an average four-quarter earnings surprise of 695.8%. BCB Bancorp NJ ( BCBP Quick Quote BCBP - Free Report) operates as the holding company for BCB Community Bank, a state-chartered commercial bank that provides banking products and services to businesses and individuals in the United States. BCB Bancorp has an average four-quarter earnings surprise of 14.2%. Richardson Electronics ( RELL Quick Quote RELL - Free Report) engages in power and microwave technologies, customized display solutions, and healthcare businesses. Richardson Electronics has an average four-quarter earnings surprise of 36.8%.
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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