A company with strong liquidity always has the potential to provide higher returns as stable financial resources help fuel its 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 of investing in a stock with high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently.
Therefore, in addition to the sufficient cash in hand, an investor may also consider a company’s capital deployment abilities before putting his money on its stock. A healthy company with favorable liquidity may prove to be a profitable pick 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 11.
Here are four of the five stocks that qualified the screen:
Based in Luxembourg, MagnaChip Semiconductor Corp. (MX - Free Report) designs, manufactures and sells analog and mixed-signal semiconductor platform solutions for communications, Internet of Things, consumer, industrial and automotive applications. The Zacks Consensus Estimate for 2020 bottom line has moved 91% north to 65 cents in the past 30 days. The company has a Growth Score of A.
Domiciled in Miami, FL, International Money Express, Inc. (IMXI - Free Report) is a software-as-a-service company focused on customer service and engagement, offering an array of products and services. The company has an impressive Growth Score of A. The Zacks Consensus Estimate of $1.02 for 2020 has been constant over the past 30 days.
Headquartered in Salt Lake City, UT, USANA Health Sciences (USNA - Free Report) develops and manufactures high-quality nutritional, personal care and weight management products. The company has a Growth Score of B. The Zacks Consensus Estimate for 2020 earnings of $4.69 has been revised 7% upward in the past 30 days.
Seattle, WA-based Trupanion, Inc. (TRUP - Free Report) operates as a direct-to-consumer monthly subscription service provider of a medical insurance plan for cats and dogs. The company has a Growth Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings has been stable at 3 cents in 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.