Liquidity is an important yardstick that many investors tend to ignore. It primarily indicates a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents. These stocks have always been in demand due to their potential to provide maximum returns.
However, one should be cautious before investing in liquid stocks. While a high liquidity level may mean that the company is meeting its obligations at a faster rate as compared to others in its domain, it may also indicate that the company is failing to use its assets efficiently.
Hence, one should consider a company’s efficiency level in addition to its liquidity for identifying potential winners as this combination is indicative of the underlying financial strength.
Measures to Identify Liquid Stocks
Current Ratio: It measures current assets relative to current liabilities. This ratio is used for measuring a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio — also known as working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered ideal.
Quick Ratio: Unlike current ratio, quick ratio – also called “acid-test ratio" or "quick assets ratio" – indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.
Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It measures a company’s ability to meet its current debt obligations using the most liquid of assets. Though a cash ratio higher than 1 may point to sound financials, a high number may indicate inefficiency in cash utilization.
So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.
In order to pick the best of the lot, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is the ratio of total sales over the past 12 months to the last four-quarter average of total assets. Though this ratio varies across industries, companies with a ratio higher than their respective industries can be considered efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential, we have added our proprietary Growth Style Score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios of greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization greater than industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks Rank equal to #1 (Only Strong Buy-rated stocks can get through). You can see the complete list of today’s Zacks #1 Rank stocks here.
Growth Style Score less than or equal to B(Back-tested results show that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 or 2 handily beat other stocks.)
These criteria have narrowed down the universe of over 7,700 stocks to only four.
Here are four stocks that qualified the screen:
Based in Huntsville, AL, ADTRAN, Inc. ADTN designs, manufactures, markets and services network access solutions for communication networks. The company has a favorable Growth Score of A and came up with average four-quarter beat of 114.13%. The Zacks Consensus Estimate for 2019 earnings has been revised upward from 18 cents to 42 cents over the last 60 days.
Atlanta, GA Cardlytics, Inc. CDLX is engaged in developing a purchase intelligence platform. The company has an impressive Growth Score of A and delivered average four-quarter positive surprise of 44.46%. The Zacks Consensus Estimate for 2019 earnings has narrowed from a loss of 90 cents to a loss of 63 cents in the last 60 days.
Long Beach, CA-domiciled Molina Healthcare, Inc. MOH is a provider of government sponsored plans, namely Medicare and Medicaid. The company has a favorable Growth Score of B and pulled off average four-quarter positive surprise of 88.2%. The Zacks Consensus Estimate for 2019 earnings is pegged at $10.88, up 10% over the last 60 days.
Headquartered in the Scottsdale, AZ, Carlisle Companies Incorporated CSL is a diversified, global portfolio of niche brands and businesses with highly engineered and high-margin products.The Zacks Consensus Estimate for 2019 earnings per share has been raised 5% to $7.80 in the last 60 days. The company has an attractive Growth Score of B and delivered average four-quarter positive surprise of 19.07%.
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ADTRAN, Inc. (ADTN) : Free Stock Analysis Report
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