The financial strength criterion of Benjamin Graham, the father of value investing, states that if investors screen for stocks whose current ratio exceeds 2 and the working capital is higher than long-term debt, they have greater chances of coming across quality companies.
Quality stocks are set to perform better than most of their competitors, no matter what the phase of the business cycle is.
The current ratio, which is calculated as total current assets divided by total current liabilities, ascertain the company's ability to pay short-term financial obligations.
The working capital ratio, which is calculated as total current asset minus total current liabilities, gauges the ability of the company to continue to operate its business smoothly and fulfill all its financial obligations.
Below are some results of my search. Further, analysts on Wall Street recommend a positive rating of hold to buy, which underpins expectations for stocks that will perform well.
The first security is Copart Inc. (NASDAQ:CPRT). Based in Dallas, the company is an online provider of auctions and vehicle remarketing services.
Copart has a current ratio of 2.44 as of July 28, which is above the industry median of 1.64.
The current ratio is ranked higher than 707 peers out of a total of 963 companies operating in the business services industry.
The GuruFocus chart shows that Copart had approximately $405.2 million in its trailing 12-month working capital and $400 million in long-term debt as of July 28.
GuruFocus assigned a very positive rating of 7 out of 10 for the company's financial strength and the highest rating possible (10 out of 10) for its profitability.
Shares of Copart closed at $85.99 on Friday for a market capitalization of $19.98 billion. The stock has a price-earnings ratio of 34.81 compared to the industry median of 17.14 and a price-sales ratio of 10.12 versus the industry median of 0.96.
Wall Street issued an overweight recommendation rating for shares of Copart with an average target price of $86.22. The rating indicates the stock is expected to outperform either the industry or the entire market within a year.
The second stock is Avalara Inc. (NYSE:AVLR). Headquartered in Seattle, the company is a worldwide provider of cloud-based solutions for transaction tax compliance.
The stock has a current ratio of 2.31 as of March 28, which tops the industry median of 1.72.
The current ratio of Avalara is ranked higher than 1,278 peers out of a total of 1,986 companies operating in the software industry.
According to GuruFocus, as of March 28, Avalara's trailing 12-month working capital is $21.63 million. The company doesn't have any long-term debt.
GuruFocus assigned a very positive 7.8 out of 10 rating for the company's financial strength, but its profitability is ranked with the lowest 1 out of 10 rating.
However, the company has grown its revenue in the first three quarters of 2019, by 38.5% year over year to $85 million in first quarter, by 43% to $91.3 million in second quarter and by 41% to $98.53 million in third quarter, beating forecasters in each period. The company has also topped analysts on earnings per share in each of the three quarters. Further, the company is projected to continue to do so in the future as analysts recommend buying the stock with a price target of $99.67 per share.
Shares of Avalara closed at $72.36 on Friday for a market capitalization of $5.57 billion. The stock has a price-book ratio of 11.99 versus the industry median of 2.75 and a price-sales ratio of 14.57 versus the industry median of 2.2.
The third stock is Makita Corp. (MKTAY). The company is a Japanese manufacturer and vendor of electric power tools, pneumatic tools, as well as woodworking machines and equipment for gardening and household maintenance.
As of Dec. 28, 2018, Makita has a current ratio of 5.13 versus the industry median of 1.84. Makita is topping 2,168 out of a total of 2,315 companies operating in the industrial products industry in terms of a better current ratio.
Based on the chart below, as of Dec. 28, 2018, Makita's trailing 12-month working capital is $907.4 million and it has no long-term debtl.
Moreover, GuruFocus assigned a very high rating of 9 out of 10 for the company's financial strength and a very positive rating of 7 out of 10 for its profitability.
Shares of Makita closed at $33.53 on Friday for a market capitalization of $9.1 billion. The stock has a price-earnings ratio of 19.39 versus the industry median of 18.75 and a price-sales ratio of 2.01 compared to the industry median of 1.05.
Wall Street issued a hold recommendation rating for shares of Makita with an average target price of $32.22.
Disclosure: I have no positions in any securities mentioned.
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This article first appeared on GuruFocus.