A company with favorable liquidity always has the potential to provide higher returns as liquidity supports the company’s business growth. It indicates a company’s capability of meeting its debt obligations by converting its assets into liquid cash and equivalents.
However, one should be careful about investing in a stock with high liquidity level as it may also imply that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may consider the operating excellence of the company before putting his money on the stock. An efficient company with favorable liquidity may prove to be profitable for one’s portfolio.
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 15.
Here are four of the 11 stocks that qualified the screen:
Headquartered in New York, Ubiquiti UI offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. The company has a Growth Score of B and average four-quarter positive surprise of 16.1%. The Zacks Consensus Estimate for fiscal 2020 earnings has been stable at $5.79 in the past 30 days.
Headquartered in Evansville, IN, Shoe Carnival, Inc. offers men, women and children a broad assortment of moderately priced dress, casual and athletic footwear with emphasis on national and regional brands. The Zacks Consensus Estimate for fiscal 2020 bottom line has been intact at $2.88 in the past 30 days. The company has a Growth Score of A and average four-quarter beat of 11.54%.
Hayward, CA-based Ultra Clean Holdings, Inc. UCTT designs, develops, prototypes, engineers, manufactures and tests production tools, modules and subsystems for the semiconductor and displays capital equipment industries, primarily in North America, Asia and Europe. The company has a Growth Score of B and average four-quarter positive earnings surprise of 25.37%. The Zacks Consensus Estimate of $1.40 for 2020 earnings has been constant in the past 30 days.
Irvine, CA-based Tilly's Inc. TLYS is a specialty retailer in the action sports industry, selling clothing, shoes and accessories. The company has a Growth Score of B and average four-quarter positive earnings surprise of 43.13%. The Zacks Consensus Estimate for fiscal 2020 of 88 cents has been raised 6% over the past 30 days.
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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.