Companies with favorable efficiency levels are poised to be on investors’ radar irrespective of market conditions. This is because a company with a favorable efficiency level is expected to provide impressive returns as it is believed to be positively correlated with the company’s price performance. Efficiency or the company's ability to transform its inputs into outputs is an important measure to determine its financial condition.
Key Ratios to Identify Efficiency
Sometimes it becomes difficult to measure the efficiency level of a company. This is the reason 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 4-quarter average inventory is considered to be 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 weak sales, which resulted in excess inventory.
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 signals that the company is capable of collecting its accounts receivables or that it has quality customers.
Asset Utilization: This ratio indicates a company’s capability to convert its 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 4-quarter average of total assets. Like the above two ratios, high asset utilization may also indicate that a company is efficient.
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 its operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.
In addition to the above-mentioned ratios, we have added a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) to the screen with an objective to make this strategy more profitable.
Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than 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 only 16.
Here are four stocks from the 16 that made it through the screen:
Lululemon Athletica inc. (LULU - Free Report) is a designer, distributor and retailer of athletic apparel. The company operates through two segments: Company-operated stores and Direct to consumer. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 8.51%.
Sanderson Farms, Inc. (SAFM - Free Report) is an integrated poultry processing company, produces, processes, markets, and distributes fresh, frozen, and prepared chicken products in the United States. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 14.02%.
IDEXX Laboratories, Inc. (IDXX - Free Report) develops, manufactures and distributes products and provides services for the companion animal veterinary, livestock and poultry, dairy and water testing markets. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 9.28%. You can see the complete list of today’s Zacks #1 Rank stocks here.
NVR, Inc. (NVR - Free Report) is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 14.19%.
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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
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