Liquidity of a stock is an important yardstick that investors often ignore. It primarily indicates a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents.
These stocks have always been in demand due to their potential to provide maximum returns. However, one should exercise caution before investing in such stocks. While a high liquidity level may imply that a 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 may consider a company’s efficiency level in addition to its liquidity to identify potential winners.
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 10.
Here are four of the 10 stocks that qualified the screen:
Irvine, CA-based Tilly's Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry, selling clothing, shoes and accessories. The company has a Growth Score of A and delivered average four-quarter positive surprise of 41.84%. The Zacks Consensus Estimate for fiscal 2020 has been stable at 83 cents over the past 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 in complex storage networks. The company has a Growth Score of A and pulled off average four-quarter positive surprise of 5.73%. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised a penny upward to $1.30 in the past 30 days.
Domiciled in Lynnwood, WA, Zumiez Inc. (ZUMZ - Free Report) is a specialty retailer for a range of apparel, footwear and accessories. The company has an impressive Growth Score of A and average four-quarter positive surprise of 60.92%. The Zacks Consensus Estimate of $2.16 for fiscal 2020 has been constant over the past 30 days.
Newport Beach, CA-based Chipotle Mexican Grill Inc. (CMG - Free Report) along with subsidiaries operates quick-casual and fresh Mexican food restaurant chains.The company has a Growth Score of B and came up with average four-quarter beat of 13.21%. The Zacks Consensus Estimate for 2019 earnings of $13.38 has been raised 0.1% in the past 30 days.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.