Current Ratio

By Kevin Matras
On 1:00 am EDT, Tuesday October 27, 2009

This week, I'm focusing on another ratio to help gauge a company's financial health: the Current Ratio.

It's calculated by dividing current assets by current liabilities.

The higher the ratio the better, meaning the company has more liquid assets to meet its short-term obligations.

A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good.

Currently, the average current ratio for the stocks in the S&P 500 is 2.09.

(This is a nice improvement from mid-year when it was at 1.75; and an even bigger improvement from the beginning of the year when it was at 1.67.)

How to Use

Screening for this is quite easy to do.

It's a ratio, so on any of our screeners, including the Research Wizard, you'd want to first go to 'Ratios'. And then go to the 'Liquidity and Coverage' section.

From there, you'll find an item called 'Current Ratio'. That's the one.

As for what value to use, I prefer to compare a stock's Current Ratio to the median for its Industry.

And in this week's screen, were doing just that. We'll also add in some other items to help us find sound companies with solid prospects for the future.

Screen Parameters

Zacks Ranks = 1

(Only Strong Buys allowed.)
Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)
Current ratio > 2
(And at the very least, we want the companies to exceed the commonly held definition of good, which means greater than 2.)
Projected 1 Yr. Growth Rate > median for its respective X Industry
(This means we're looking for the companies with the best growth rates within their groups.)
Projected 1 Yr. Growth Rate > 0
(I only want positive projected growth rates.)
Price >= $5
Volume >= 100,000

Here are 5 stocks that passed this week's screen:

BLK BlackRock, Inc.

CBT Cabot Corp.

FIRE Sourcefire, Inc.

ISRG Intuitive Surgical, Inc.

VRX Valeant Pharmaceuticals

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: http://www.zacks.com/performance.

BLACKROCK INC (BLK): Free Stock Analysis Report

CABOT CORP (CBT): Free Stock Analysis Report

SOURCEFIRE INC (FIRE): Free Stock Analysis Report

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