The liquidity of a stock is an important yardstick that many investors tend to ignore. It primarily indicates a company's capability to meet debt obligations by converting its assets into liquid cash and equivalents. Liquid stocks have always been in demand due to their potential to provide significant returns.
However, one should exercise caution before investing in such stocks. While a high liquidity level may imply that the company is meeting its obligations at a faster rate than its peers, 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
Current Ratio: It measures current assets relative to current liabilities. This ratio is used for measuring 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 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 of more than 1 may point to sound financials, a higher number may indicate inefficiency in cash utilization.
So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.
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 the 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 Score less than or equal to B (Back-tested results show that stocks with a Growth 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 14.
Here are five of the14 stocks that qualified the screen:
Basking Ridge, NJ-based Conduent Incorporated (CNDT - Free Report) is a business process services company engaged in providing business and government services to citizens, patients, customers and employees.The company has a Growth Score of A and delivered an average four-quarter positive earnings surprise of 11.21%. The Zacks Consensus Estimate for fiscal 2018 earnings per share remained stable at $1.15 over the last 30 days.
Headquartered in Baltimore, MD, Medifast (MED - Free Report) is one of the major providers of healthy living products. The company has a Growth Score of A and delivered an average four-quarter positive earnings surprise of 16.57%.The Zacks Consensus Estimate for fiscal 2018 earnings per share remained unchanged at $4.50 over the last 30 days.
Tinton Falls, NJ-based, Commvault Systems, Inc. (CVLT - Free Report) is a provider of Unified Data Management solutions for data protection, universal availability and simplified management of data on complex storage networks. The company has a Growth Score of A and delivered an average four-quarter positive earnings surprise of 1.32%. The Zacks Consensus Estimate for fiscal 2019 earnings of $1.69 remained unchanged in the last 30 days.
Long Beach, CA-based Molina Healthcare, Inc. (MOH - Free Report) is a provider of government sponsored plans -- Medicare and Medicaid. The company has a Growth Score of B and delivered an average four-quarter positive earnings surprise of 164.27%. The Zacks Consensus Estimate for the current year increased by a penny to $7.51 over the last 30 days.
Headquartered in Sunnyvale, CA, Fortinet Inc. (FTNT - Free Report) is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide. The company has a Growth Score of B and delivered an average four-quarter positive earnings surprise of 21.68%. The Zacks Consensus Estimate for fiscal 2018 earnings of $1.67 remained unchanged in the last 30 days.
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