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Liquidity is an important yardstick that many investors tend to ignore. It primarily indicates a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents. These stocks have always been in demand due to their potential to provide maximum returns.
However, one should be careful before investing in liquid stocks. While a high liquidity level may mean that the company is meeting its obligations at a faster rate compared to others in its domain, it may also indicate that the company is failing to use its assets efficiently.
Hence, one should consider the efficiency level of a company in addition to its liquidity to identify potential winners as this combination is indicative of underlying financial strength.
Measures to Identify Liquid Stocks
Liquidity ratios like Current Ratio, Quick Ratio and Cash Ratio are primarily used to identify companies with strong liquidity.
Current Ratio: It measures current assets relative to current liabilities. This ratio is used to measure a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio – also known as working capital ratio – below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered to be ideal.
Quick Ratio: Unlike current ratio, quick ratio – also called “acid-test ratio" or "quick assets ratio" – indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.
Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It measures a company’s ability to meet its current debt obligations using the most liquid of assets. Though a cash ratio over 1 may point to sound financials, a high number may indicate inefficiency in cash utilization.
So, a ratio of greater than 1 is desirable at all times but may not always underline a company’s financial health.
Screening Parameters
In order to pick the best of the lot, 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 considered efficient.
In order 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 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.)
(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.)
These criteria have narrowed down the universe of over 7,700 stocks to only six.
Here are four of the six stocks that qualified the screen:
Goleta, CA-based AppFolio Inc. (APPF - Free Report) offers cloud-based software solutions for property management and legal industries. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 75.33%. The Zacks Consensus Estimate for 2017 earnings remained steady at a penny over the last 30 days.
Lincoln, NE-based National Research Corp offers analytics and insights that facilitate revenue growth, patient, employee, customer retention and patient engagement. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 4.37%. The Zacks Consensus Estimate for 2017 earnings remained stable at 90 cents over the last 30 days.
Based in Chicago, IL, Telephone and Data Systems Inc. (TDS - Free Report) is a diversified telecom service provider offering wireless and wireline services in 36 states. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 802.41%. The Zacks Consensus Estimate for 2017 earnings has surged 130.8% to 30 cents per share over the last 30 days.
Tampa, FL-based WellCare Health Plans Inc. is a leading managed care company. It primarily focuses on providing government-sponsored managed care services. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 59.23%. Moreover, the Zacks Consensus Estimate for 2017 earnings remained steady at $6.88 over the last 30 days.
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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Top 4 Liquid Stocks to Snap Up Now
Liquidity is an important yardstick that many investors tend to ignore. It primarily indicates a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents. These stocks have always been in demand due to their potential to provide maximum returns.
However, one should be careful before investing in liquid stocks. While a high liquidity level may mean that the company is meeting its obligations at a faster rate compared to others in its domain, it may also indicate that the company is failing to use its assets efficiently.
Hence, one should consider the efficiency level of a company in addition to its liquidity to identify potential winners as this combination is indicative of underlying financial strength.
Measures to Identify Liquid Stocks
Liquidity ratios like Current Ratio, Quick Ratio and Cash Ratio are primarily used to identify companies with strong liquidity.
Current Ratio: It measures current assets relative to current liabilities. This ratio is used to measure a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio – also known as working capital ratio – below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered to be ideal.
Quick Ratio: Unlike current ratio, quick ratio – also called “acid-test ratio" or "quick assets ratio" – indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.
Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It measures a company’s ability to meet its current debt obligations using the most liquid of assets. Though a cash ratio over 1 may point to sound financials, a high number may indicate inefficiency in cash utilization.
So, a ratio of greater than 1 is desirable at all times but may not always underline a company’s financial health.
Screening Parameters
In order to pick the best of the lot, 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 considered efficient.
In order 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 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.)
These criteria have narrowed down the universe of over 7,700 stocks to only six.
Here are four of the six stocks that qualified the screen:
Goleta, CA-based AppFolio Inc. (APPF - Free Report) offers cloud-based software solutions for property management and legal industries. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 75.33%. The Zacks Consensus Estimate for 2017 earnings remained steady at a penny over the last 30 days.
Lincoln, NE-based National Research Corp offers analytics and insights that facilitate revenue growth, patient, employee, customer retention and patient engagement. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 4.37%. The Zacks Consensus Estimate for 2017 earnings remained stable at 90 cents over the last 30 days.
Based in Chicago, IL, Telephone and Data Systems Inc. (TDS - Free Report) is a diversified telecom service provider offering wireless and wireline services in 36 states. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 802.41%. The Zacks Consensus Estimate for 2017 earnings has surged 130.8% to 30 cents per share over the last 30 days.
Tampa, FL-based WellCare Health Plans Inc. is a leading managed care company. It primarily focuses on providing government-sponsored managed care services. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 59.23%. Moreover, the Zacks Consensus Estimate for 2017 earnings remained steady at $6.88 over the last 30 days.
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 »