Building a portfolio comprising stocks with favorable liquidity is the way to go for investors seeking healthy returns.
Liquidity is a measure of a company’s capability to meet its short-term debt obligations. Thus, companies boasting impressive liquidity positions may be considered to have solid financial health.
However, one should be careful about investing in a stock with high liquidity level as it may also indicate that the company is failing to utilize assets efficiently.
Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to 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 10.
Here are four of the 10 stocks that qualified the screen:
Headquartered in Fremont, CA, Enphase Energy, Inc. (ENPH - Free Report) is a global energy technology company that delivers energy management technology for the solar industry. It designs, develops, manufactures and sells home energy solutions, which connect energy generation, energy storage and control and communications management on one intelligent platform. The Zacks Consensus Estimate for 2020 earnings has moved north by 25.7% to $1.27 in the past 60 days. The company has a Growth Score of A and a trailing four-quarter positive earnings surprise of 34.16%, on average.
San Francisco, CA-based Dropbox, Inc. (DBX - Free Report) is a provider of collaboration platform that enables users to organize workspace processes with cloud storage, personal cloud, file synchronization and other subscription-based premium services. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 24.6% to 71 cents in the past 60 days. The company has a Growth Score of A and a trailing four-quarter positive earnings surprise of 31.04%, on average.
Headquartered in New York, NY, ExlService Holdings, Inc. (EXLS - Free Report) is a provider of operations management, business process management (“BPM”) and analytics services globally. The Zacks Consensus Estimate for 2020 earnings has been revised 3.5% upward to $3.51 in the past 30 days. The company has a Growth Score of B and a trailing four-quarter positive earnings surprise of 7.21%, on average.
Based in Santa Clara, CA, Telenav, Inc. (TNAV - Free Report) is a provider of location-based and connected car platform services worldwide. The company has a Growth Score of B and a trailing four-quarter positive surprise of 77.05%, on average. The Zacks Consensus Estimate for fiscal 2020 bottom line has been revised to earnings of 21 cents from a loss of 23 cents in the past 60 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.