To increase the odds of unearthing high-quality companies, Benjamin Graham, the father of value investing, recommended investors to look for stocks with a current ratio of more than two and a higher working capital than long-term debt. These stocks have a higher chance to outperform their competitors.
The current ratio indicates whether the balance sheet provides the company with sufficient margins to pay off its short-term creditors. The ratio is a quotient where total current assets are the numerator and total current liabilities are the denominator.
When the difference between total current assets and total current liabilities (aka working capital) exceeds the long-term debt, it signals that the balance sheet of the company is solid. Thus, resources are sufficient to hold activities and refund the lenders of capital.
In addition to meeting the above criteria, these three stocks also have positive ratings from sell-side analysts on Wall Street ranging between overweight to buy.
The first company I researched that met the criteria was Prosus N.V. (PROSF). The company is a Dutch owner and operator of online platforms covering a broad range of e-commerce worldwide.
The stock has a current ratio of 4.16, which is better than the industry median of 2.06. The current ratio of Prosus is ranked higher than 76.74% of competitors operating in the interactive media industry.
Prosus has a trailing 12-month working capital exceeding its long-term debt by $5.2 billion as of March 31, 2019, which marks the end of the company's full fiscal 2019.
Shares of Prosus N.V. closed at $74.14 on Dec. 20 for a market capitalization of $121.03 billion. The stock has a price-earnings ratio of 21.58 versus the industry median of 26.95 and a price-sales ratio of 35.06 versus the industry median of 2.92.
Wall Street issued a moderate buy recommendation rating for shares of Prosus N.V.
The second company I found that met these criteria was Meituan Dianping (MPNGF). Based in Beijing, the Chinese company owns and operates an online platform that facilitates trading between consumers and merchants.
Meituan Dianping has a current ratio of 2.32, which is better than the industry median of 1.46. The current ratio is ranked higher than 74.90% of competitors operating in the internet retail industry.
The GuruFocus chart below shows that the trailing 12-month working capital was $6 billion and the trailing 12-month long-term debt was $68.3 million as of the end of fiscal 2018.
Shares of Meituan Dianping closed at $13.10 on Friday for a market capitalization of $75.96 billion. The stock has a forward price-earnings ratio of 70.92 versus the industry median of 17.51 and a price-sales ratio of 3.78 versus the industry median of 0.57.
Wall Street issued a buy recommendation rating for this stock.
The third company I found that met the criteria was Ansys Inc. (NASDAQ:ANSS).
Based in Canonsburg, Pennsylvania, the company is a global developer and marketer of engineering simulation software and services.
Ansys has a current ratio of 2.24, which is better than the industry median of 1.74. In terms of better current ratio, the company surpasses 67.76% of competitors operating in the software-application industry.
Ansys' trailing 12-month working capital was $786.4 million and its trailing 12-month long-term debt was zero as of the end of fiscal year 2018.
GuruFocus assigned a rating of 7 out of 10 for the company's financial strength and the top rating of 10 out of 10 for its profitability.
Shares of Ansys Inc. closed at $258.89 on Friday for a market capitalization of $22.13 billion. The stock has a price-earnings ratio of 50.56 versus the industry median of 25.18 and a price-sales ratio of 15.33 versus the industry median of 2.18.
Wall Street issued an overweight recommendation rating for shares of Ansys Inc.
Disclosure: I have no positions in any securities mentioned.
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This article first appeared on GuruFocus.