Companies with favorable efficiency levels are likely to be on investors’ radar irrespective of market conditions as price performance is believed to be positively correlated with efficiency. Efficiency, a company’s ability to transform inputs into outputs, is a potential indicator of a company’s financial health.
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 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 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 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.
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.
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 has narrowed down the universe of over 7,906 stocks to only 22.
Here are five stocks from the 22 that made it through the screen:
Lululemon Athletica (LULU - Free Report) , an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The company has an average four-quarter positive earnings surprise of 8.1%. The stock has a Zacks Rank #2.
Exelixis (EXEL - Free Report) , a biopharmaceutical company, engages in the discovery, development, and commercialization of new medicines with the potential to enhance care and outcomes for people with cancer. The company has an average four-quarter positive earnings surprise of 572.9%. The stock carries a Zacks Rank #2.
IDEXX Laboratories (IDXX - Free Report) develops, manufactures, and distributes products and services primarily for the companion animal veterinary, livestock and poultry, dairy, and water testing markets worldwide. The company has an average four-quarter positive earnings surprise of 7.3%. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teradyne (TER - Free Report) designs, develops, manufactures, sells, and supports automatic test equipment worldwide. The company has an average four-quarter positive earnings surprise of 20.3%. The stock flaunts a Zacks Rank #1.
Pioneer Natural Resources (PXD - Free Report) operates as an independent oil and gas exploration and production company in the United States. The company has an average four-quarter positive earnings surprise of 67.6%. The stock has a Zacks Rank #1.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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 »