Liquidity is an important yardstick that indicates a company’s capability to meet debt obligations by converting its assets into cash. Liquid stocks have always been in demand owing to potential for providing the maximum returns.
However, one should be careful before investing in such stocks. While a high-liquidity level might mean that the company is fulfilling its obligations with greater speed compared with others in the bracket, it may also suggest that the company is unable to utilize its assets to optimum.
Hence, one may consider the efficiency level of a company in addition to its liquidity to identify potential winners as this combination is indicative of the 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 more than 7,700 stocks to only six.
Here are four of the six stocks that qualified the screen:
Headquartered in Toronto, Canada, Kirkland Lake Gold Ltd. (KL - Free Report) engages in the acquisition, exploration, development and operation of gold properties. The company has a Growth Score of A and delivered average four-quarter positive surprise of 6.07%. The Zacks Consensus Estimate for 2019 earnings has been revised 4.2% upward to $2.22 in the last 30 days.
Miami, FL-based Vector Group Ltd. (VGR - Free Report) primarily engages in the manufacturing and sale of cigarettes and the sale of information processing systems. The company has a Growth Score of B and delivered average four-quarter positive surprise of 59.96%. The Zacks Consensus Estimate for the current year has increased 54% to 57 cents over the last 30 days.
Domiciled in El Segundo, CA, Aerojet Rocketdyne Holdings, Inc. (AJRD - Free Report) designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. The company has an impressive Growth Score of B and average four-quarter positive surprise of 25.46%. The Zacks Consensus Estimate of $1.9 for the current year has moved 13.8% north over the last 30 days.
Headquartered in Beijing, China, Qudian Inc (QD - Free Report) is a provider of online small consumer credit products, primarily in the Peoples Republic of China. The company has a Growth Score of B and came up with average four-quarter beat of 18.83%. The Zacks Consensus Estimate for 2019 earnings has been stable at $2.16 in the last 30 days.
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