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A company with a favorable liquidity position always has the potential to provide higher returns, as liquidity supports the company’s business growth. It indicates a company’s capability of meeting its debt obligations by converting its assets into liquid cash and equivalents.
However, one should be careful about investing in a stock with a high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to one’s portfolio.
How to Measure Liquidity?
Liquidity ratios – current, quick and cash ratios – are considered as popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company’s capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company’s potential to meet its short- as well as long-term debt obligations, a company’s quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only its short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.
On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company’s potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquid levels.
Screening Parameters
Besides considering ideal ranges of liquidity ratios, we have added asset utilization in our screening parameters with an objective to screen the efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered as one of the popular means of identifying efficient companies.
In order to make our strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.
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.)
Growth Style Score less than or equal to B
(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only 12.
Get the rest of the 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.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Bet on These 5 Liquid Stocks for Fat Returns
A company with a favorable liquidity position always has the potential to provide higher returns, as liquidity supports the company’s business growth. It indicates a company’s capability of meeting its debt obligations by converting its assets into liquid cash and equivalents.
However, one should be careful about investing in a stock with a high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to one’s portfolio.
How to Measure Liquidity?
Liquidity ratios – current, quick and cash ratios – are considered as popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company’s capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company’s potential to meet its short- as well as long-term debt obligations, a company’s quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only its short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.
On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company’s potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquid levels.
Screening Parameters
Besides considering ideal ranges of liquidity ratios, we have added asset utilization in our screening parameters with an objective to screen the efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered as one of the popular means of identifying efficient companies.
In order to make our strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.
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.)
Growth Style Score less than or equal to B
(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only 12.
Here are five stocks from the list:
Neogenomics Inc. (NEO - Free Report)
LPL Financial Holdings Inc. (LPLA - Free Report)
Silicon Laboratories Inc. (SLAB - Free Report)
Netgear Inc. (NTGR - Free Report)
Amphastar Pharmaceuticals, Inc. (AMPH - Free Report)
Get the rest of the 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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »