Companies with favorable liquidity levels are generally speculated to have impressive business growth, which in turn has a positive impact on their price performance. Liquidity 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.
Measures to Identify Liquid Stocks
Current, quick and cash ratios are considered as the main pointers 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, the 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 calculating 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.
In order to avoid selection of inefficient companies, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is a ratio of total sales over 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 called efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential too, 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 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. You can see the complete list of today’s Zacks #1 Rank stocks here.)
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 eight.
Here are five stocks from the list:
Nxstage Medical, Inc. (NXTM - Free Report) is a medical technology company. Nxstage has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 46.3%.
Brooks Automation, Inc. (BRKS - Free Report) delivers automation solutions to the global semiconductor and related industries. Brooks Automation has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of more than 100%.
KVH Industries Inc. designs, develops, manufactures, and markets mobile communication products and services. KVH Industries has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of more than 100%.
Tilly's, Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes and accessories. Tilly's has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 73.7%.
EnerSys (ENS - Free Report) manufactures, markets, and distributes industrial batteries. EnerSys has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 3%.
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 backtesting 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 »