The efficiency ratio is an indication of a company’s financial health. It analyzes how efficiently a company uses its assets and liabilities internally.

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

To that end, Owlet (OWLT Quick QuoteOWLT - Free Report) , Texas Capital Bancshares (TCBI Quick QuoteTCBI - Free Report) , Western Digital (WDC Quick QuoteWDC - Free Report) and Brinker International (EAT Quick QuoteEAT - Free Report) have made it through the screen process:

Efficiency Ratios – to be Considered

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 level of inventory 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 Using Research Wizard:

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 narrowed down the universe of over 7,906 stocks to six.

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

Owlet

Owletprovides a digital parenting platform that aims to give parents real-time data and insights to help them feel calmer and more confident. OWLT has an average four-quarter positive earnings surprise of 87.8%.

Texas Capital Bancshares

Texas Capital Bancsharesis a full-service financial services firm that delivers customized solutions to businesses, entrepreneurs, and high-net-worth individuals in five major metropolitan areas of TX: Dallas, Houston, Fort Worth, Austin and San Antonio. TCBI has an average four-quarter positive earnings surprise of 15.1%.

Western Digital

Western Digitalis a leading developer and manufacturer of data storage devices and solutions based on NAND flash and hard disk drive technologies. WDC has an average four-quarter positive earnings surprise of 11.2%.

Brinker International

Brinker Internationalowns, operates, develops and franchises various restaurants under Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. EAT has an average four-quarter positive earnings surprise of 8.2%.