Efficiency, which is the ability to transform inputs into outputs, is a potential indicator of a company’s financial health. Companies with favorable efficiency levels are likely to be on investors’ radar irrespective of market conditions. This is because a company with a favorable efficiency level is expected to provide impressive returns as it is believed to be positively correlated with the company’s 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 indicates that the company is facing declining sales, which 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 — 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 narrowed down the universe of over 7,906 stocks to only 16.
Here are five stocks from the 14 that made it through the screen:
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 8.1%. The stock sports a Zacks Rank #1.
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NVR, Inc. NVR operates as a homebuilder in the United States. It primarily constructs and sells single-family detached homes, townhomes, and condominium buildings. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 17.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Marvell Technology Group Ltd. MRVL designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It has an average four-quarter positive earnings surprise of 10.1%. The stock carries a Zacks Rank #1.
Pioneer Natural Resources Company PXD operates as an independent oil and gas exploration and production company in the United States. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 67.6%.
Community Bank System, Inc. CBU operates as the holding company for Community Bank, N.A. that provides various banking and financial services to retail, commercial, and municipal customers. It has an average four-quarter positive earnings surprise of 11.5%. The stock sports a Zacks Rank #1.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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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Marvell Technology Group Ltd. (MRVL) : Free Stock Analysis Report
Community Bank System, Inc. (CBU) : Free Stock Analysis Report
NVR, Inc. (NVR) : Free Stock Analysis Report
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
lululemon athletica inc. (LULU) : Free Stock Analysis Report
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