Efficiency, a company’s ability to transform its inputs into outputs, is a potential indicator of a company’s financial health. Efficiency level is believed to have a direct relationship with the price performance of a stock. Companies with favorable efficiency levels are expected to see upward movement in stocks prices.
Ratios to Evaluate Efficiency Levels
We have considered four popular ratios in order to find efficient companies that have the potential to provide impressive returns.
Inventory level is one of the key indicators of a company’s business health. While a high inventory level may indicate that the company is going through a rough patch in terms of sales, a dwindling level may indicate that the company will run out of stock in a favorable sales condition. This is where inventory turnover comes into play. It is the ratio of 12-month cost of goods sold (COGS) to a 4-quarter average inventory. Thus, a high value of the ratio indicates a low level of inventory relative to COGS, while a low ratio signals that the company has excess inventory.
This ratio is used to measure a company’s capability to extend its credit and collect debts on the basis of that credit. The receivables turnover ratio or the “accounts receivable turnover ratio” or the “debtor’s turnover ratio” is calculated by dividing 12-month sales by four-quarter average receivables. While a high ratio may indicate that the company efficiently collects its accounts receivables or has quality customers, a low ratio may signal that the company has an inefficient collection procedure or has low-quality customers or an inefficient credit policy.
This is a widely used measure of a company’s efficiency. Asset utilization indicates a company’s potential to utilize its assets. It is the ratio of total sales over the past 12 months to the last 4-quarter average of total assets. So, the higher the ratio, the greater the possibility is that the company is utilizing its assets efficiently. On the contrary, a low value of the ratio may signal that it is failing to use its assets effectively.
Another popular efficiency ratio is operating margin. Operating profit margin, which is simply operating income over the past 12 months divided by sales over the same period, indicates how well a company is controlling its operating expenses. If a company has a high operating profit margin in relation to its competitors, it is doing a better job at controlling operating expenses.
All these ratios can be considered as effective measures if one compares different companies within a particular sector or industry. This is the reason why we have considered only those companies that have these ratios higher than their respective industry averages.
Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than industry average: The value of these ratios higher than the industry averages may indicate that the efficiency level of the company is higher than its peers.
Zacks Rank less than or equal to #2: Only Strong Buy and Buy rated stocks can get through.
The use of these very few criteria has narrowed down the universe of around 7,887 stocks to only 18.
Here are five stocks from the 18 that made it through the screen:
Teradyne, Inc. TER designs, develops, manufactures, and sells automatic test equipment. It has an average four-quarter positive earnings surprise of 24.85%. The stock sports a Zacks Rank #1 (Strong Buy).
Advanced Energy Industries, Inc. AEIS designs, manufactures, sells, and supports power conversion products and solutions that transform power into various usable forms. . It has an average four-quarter positive earnings surprise of 17.10%. The stock sports a Zacks Rank #1.
Lululemon Athletica Inc. LULU designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. It has an average four-quarter positive earnings surprise of 3.89%. The stock sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Bovie Medical Corporation BVX develops, manufactures, and markets electrosurgical devices and related medical products. It has an average four-quarter positive earnings surprise of 28.69%. The stock carries a Zacks Rank #2.
OraSure Technologies, Inc. OSUR develops, manufactures, markets, and sells oral fluid diagnostic products and specimen collection devices. It has an average four-quarter positive earnings surprise of 123.54%. The stock holds a Zacks Rank #2.
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OraSure Technologies, Inc. (OSUR): Free Stock Analysis Report
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Bovie Medical Corporation (BVX): Free Stock Analysis Report
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