Stocks that offer high returns irrespective of market conditions are most sought-after. Efficiency level, which measures a company’s ability to transform available input into output, is often considered a key parameter for gauging a company’s profit-making potential.
A company with a favorable efficiency level is likely to provide stellar returns as it is believed to be positively correlated with price performance.
Key Ratios to Identify Efficiency
Sometimes it becomes difficult to measure the efficiency level of a company. This is the reason why one must consider popular efficiency ratios while selecting stocks. These efficiency ratios are:
Inventory Turnover: The ratio of 12-month cost of goods sold (COGS) to a four-quarter average inventory is considered one of the most popular efficiency ratios. It indicates a company’s ability to maintain a suitable inventory position. While a high value indicates that the company has a relatively low level of inventory compared to COGS, a low value shows that the company is facing declining sales, which has resulted in excess inventory.
Receivables Turnover: This is the ratio of 12-month sales to four-quarter average receivables. It shows a company’s potential to extend its credit and collect debt in terms of that credit. A high receivables turnover ratio or the “accounts receivable turnover ratio” or “debtor’s turnover ratio” is desirable as it shows that the company is capable of collecting its accounts receivables or that it has quality customers.
Asset Utilization: This ratio indicates a company’s capability to convert assets into output and is thus a widely known measure of efficiency level. It is calculated by dividing total sales over the past 12 months by the last four-quarter average of total assets. Like the above ratios, high asset utilization may indicate that a company is efficient.
Operating Margin: This efficiency measure is the ratio of operating income over the past 12 months to sales over the same period. It measures a company’s ability to control operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.
In addition to the above-mentioned ratios, we have added a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) to the screen with an objective to make this strategy more profitable.
Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than industry average
(Values of these ratios higher than industry averages may indicate that the efficiency level of the company is higher than its peers.)
The use of these few criteria has narrowed down the universe of over 7,906 stocks to only 16.
Here are four stocks from the 16:
lululemon athletica Inc. LULU designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The company holds a Zacks Rank #2. It has a four-quarter average positive earnings surprise of 19.9%.
Quidel Corporation QDEL develops, manufactures and markets diagnostic testing solutions for applications in infectious diseases, cardiology, thyroid, women's and general health, eye health, gastrointestinal diseases, and toxicology. The company, with a Zacks Rank #1, has a four-quarter average positive earnings surprise of 24.8%.
China Yuchai International Limited CYD manufactures and sells diesel and natural gas engines in the People's Republic of China and internationally. This Zacks Rank #1 company has a four-quarter average positive earnings surprise of 11.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Logitech International S.A. LOGI designs, manufactures, and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms worldwide. The company carries a Zacks Rank #2. It has an average four-quarter positive earnings surprise of 19.3%.
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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
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Logitech International S.A. (LOGI) : Free Stock Analysis Report
Quidel Corporation (QDEL) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
China Yuchai International Limited (CYD) : Free Stock Analysis Report
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