Efficiency level measures a company’s capability to transform available input into output. It is often considered an important parameter for gauging the company’s potential to make profits. A company with a high efficiency level is expected to provide stellar returns, as it is believed to be positively correlated with price performance.

However, at times, it becomes difficult to measure the efficiency level of a company. This is why one must consider popular efficiency ratios while selecting stocks.

AtriCure (ATRC Quick QuoteATRC - Free Report) , REV Group (REVG Quick QuoteREVG - Free Report) , Oceaneering International (OII Quick QuoteOII - Free Report) and Analog Devices (ADI Quick QuoteADI - Free Report) made it through the screening process.

The efficiency ratios are:

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 shows 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 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 four-quarter average of total assets. Like the above ratios, high asset utilization may indicate that a company is efficient.

Inventory Turnover: The ratio of the 12-month cost of goods sold (COGS) to a four-quarter average inventory is considered 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 inventory level compared to COGS, a low value indicates that the company is facing declining sales, which has resulted in excess inventory.

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 operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.

Screening Criteria

In addition to the above-mentioned ratios, we have added a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) — to the screen to make this strategy more profitable. You can see the complete list of today’s Zacks #1 Rank stocks here.

Inventory Turnover, Receivables Turnover, Asset Utilization, and Operating Margin greater than the 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 has narrowed down the universe of over 7,906 stocks to 13.

Our Choices

Here are the top four stocks that made it through the screen:

AtriCure

AtriCureis a medical device company focused on developing, manufacturing and selling innovative surgical devices to create precise lesions, or scars, in soft tissues. ATRC has an average four-quarter earnings surprise of 67.1%.

REV Group

REV Group designs, manufactures and distributes specialty vehicles, and related aftermarket parts and services. REVG has an average four-quarter earnings surprise of nearly 22.1%.

Oceaneering International

Oceaneering International is one of the leading suppliers of offshore equipment and technology solutions to the energy industry. OII has an average four-quarter earnings surprise of 12.3%.

Analog Devices

Analog Devices is an original equipment manufacturer of semiconductor devices, specifically, analog, mixed signal and digital signal processing integrated circuits. ADI has an average four-quarter earnings surprise of 5.8%.