Liquidity is an important yardstick that indicates a company’s capability to meet debt obligations by converting its assets into cash. Liquid stocks have always been in demand owing to potential for providing maximum returns.
However, one should be careful before investing in such stocks. While a high-liquidity level might mean that the company is fulfilling its obligations at a faster rate compared with others in its domain, it may also suggest that the company is failing to use its assets with efficiency.
Hence, one may consider the efficiency level of a company in addition to its liquidity to identify potential winners as this combination is indicative of 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 of more than 1 may point to sound financials, a higher 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 Score less than or equal to B (Back-tested results show that stocks with a Growth 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 more than 7,700 stocks to only four.
Here are the four stocks that qualified the screen:
Raleigh, NC-based BioDelivery Sciences International Inc. BDSI is a specialty pharmaceutical company, which engages in the development and commercialization of pharmaceutical products in the United States and internationally.The company has an impressive Growth Score of A and delivered average four-quarter positive surprise of 20.47%. The Zacks Consensus Estimate for the current year has been stable over the last 30 days.
Headquartered at Hanover, MD, Ciena Corporation CIEN is a leading provider of optical networking equipment, software and services. The company has a Growth Score of A and came up with average four-quarter positive surprise of 18.83%. The Zacks Consensus Estimate for fiscal 2019 earnings has been revised by a couple of cents in the last 30 days.
Domiciled in Chicago, IL, United States Cellular Corporation USM provides wireless service coverage for Telephone and Data Systems across select Midwest markets. The company has an attractive Growth Score of A and pulled off average four-quarter beat of 79.32%. The Zacks Consensus Estimate for 2019 earnings has moved 6.25% upward in the last 30 days.
Based in Long Beach, CA, Molina Healthcare, Inc. MOH is a provider of government sponsored plans, namely Medicare and Medicaid.The company has a Growth Score of B and delivered average four-quarter positive surprise of 88.17%. The Zacks Consensus Estimate for fiscal 2019 earnings has been raised 0.5% over the last 30 days.
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Ciena Corporation (CIEN) : Free Stock Analysis Report
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