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Liquidity position of a company is considered as one of the popular ways to identify companies that are financially strong and have the potential to provide healthy returns. A company’s liquidity measures its ability to meet short-term debt obligations.
However, one should be careful before investing in securities of highly liquid companies as high level of liquidity may also indicate that the company is inefficient to utilize its assets. This is the reason why a strategy that successfully identifies efficient companies with favorable liquidity positions is poised to provide impressive returns irrespective of market conditions.
Key Ratios to Indicate Liquidity
Current, quick and cash ratios are considered as the main indicators of the liquidity level of a company. Current ratio or working capital ratio indicates a company’s potential to meet both short- and long-term debt obligations by measuring current assets relative to current liabilities. Contrastingly, quick ratio or acid-test ratio or quick assets ratio only seeks to measure a company’s ability to pay short-term obligations. Due to this, current assets excluding inventory are considered in building up the quick ratio.
Separately, the cash ratio – the most conservative of the three ratios – indicates a company’s potential to convert its most liquid assets to pay current debt obligations. This is the reason why it only considers cash and cash equivalents relative to the company’s current liabilities. Values of all these ratios above 1 may signal that the company is in good financial shape. However, high values of these ratios may also indicate that the company has failed to utilize its assets significantly. Hence, we consider liquidity ratios between 1 and 3 for healthy choices.
Screening Parameters
In addition to favorable liquidity ratios, we included asset utilization in our screening parameters in order to avoid screening high liquid but inefficient companies. Asset utilization, which is a ratio of total sales over the past 12 months to the last four-quarter average of total assets, is a widely used measure of a company’s efficiency. A company with high asset utilization is considered to be efficient.
Also, 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 7,700stocks to only 13.
Here are five stocks from the list:
DeVry Education Group Inc. (DV - Free Report) is headquartered in Downers Grove, Illinois and is involved in providing of educational services. DeVry has an average four-quarter positive earnings surprise of 3.9%.
Herbalife Ltd. (HLF - Free Report) is a global network marketing company offering a range of science-based weight management products, nutritional supplements and personal care products. Herbalife has an average four-quarter positive earnings surprise of 21.5%.
The Children's Place, Inc. (PLCE - Free Report) is a growing specialty retailer of apparel and accessories for children from newborn to twelve years of age. Children's Place has an average four-quarter positive earnings surprise of 9.1%.
Bruker Corporation (BRKR - Free Report) is engaged in designing and production of scientific instruments and providing solutions related to analytical system. Bruker has an average four-quarter positive earnings surprise of 37.2%.
Expeditors International of Washington Inc. (EXPD - Free Report) is engaged in the business of providing global logistics services. EXPD has an average four-quarter positive earnings surprise of 4.6%.
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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5 Liquid Stocks to Enhance Your Portfolio Return
Liquidity position of a company is considered as one of the popular ways to identify companies that are financially strong and have the potential to provide healthy returns. A company’s liquidity measures its ability to meet short-term debt obligations.
However, one should be careful before investing in securities of highly liquid companies as high level of liquidity may also indicate that the company is inefficient to utilize its assets. This is the reason why a strategy that successfully identifies efficient companies with favorable liquidity positions is poised to provide impressive returns irrespective of market conditions.
Key Ratios to Indicate Liquidity
Current, quick and cash ratios are considered as the main indicators of the liquidity level of a company. Current ratio or working capital ratio indicates a company’s potential to meet both short- and long-term debt obligations by measuring current assets relative to current liabilities. Contrastingly, quick ratio or acid-test ratio or quick assets ratio only seeks to measure a company’s ability to pay short-term obligations. Due to this, current assets excluding inventory are considered in building up the quick ratio.
Separately, the cash ratio – the most conservative of the three ratios – indicates a company’s potential to convert its most liquid assets to pay current debt obligations. This is the reason why it only considers cash and cash equivalents relative to the company’s current liabilities. Values of all these ratios above 1 may signal that the company is in good financial shape. However, high values of these ratios may also indicate that the company has failed to utilize its assets significantly. Hence, we consider liquidity ratios between 1 and 3 for healthy choices.
Screening Parameters
In addition to favorable liquidity ratios, we included asset utilization in our screening parameters in order to avoid screening high liquid but inefficient companies. Asset utilization, which is a ratio of total sales over the past 12 months to the last four-quarter average of total assets, is a widely used measure of a company’s efficiency. A company with high asset utilization is considered to be efficient.
Also, 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 7,700stocks to only 13.
Here are five stocks from the list:
DeVry Education Group Inc. (DV - Free Report) is headquartered in Downers Grove, Illinois and is involved in providing of educational services. DeVry has an average four-quarter positive earnings surprise of 3.9%.
Herbalife Ltd. (HLF - Free Report) is a global network marketing company offering a range of science-based weight management products, nutritional supplements and personal care products. Herbalife has an average four-quarter positive earnings surprise of 21.5%.
The Children's Place, Inc. (PLCE - Free Report) is a growing specialty retailer of apparel and accessories for children from newborn to twelve years of age. Children's Place has an average four-quarter positive earnings surprise of 9.1%.
Bruker Corporation (BRKR - Free Report) is engaged in designing and production of scientific instruments and providing solutions related to analytical system. Bruker has an average four-quarter positive earnings surprise of 37.2%.
Expeditors International of Washington Inc. (EXPD - Free Report) is engaged in the business of providing global logistics services. EXPD has an average four-quarter positive earnings surprise of 4.6%.
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 »