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Liquidity determines a company’s ability to honor debts by converting assets into cash and cash equivalents. Strong liquidity levels support business growth. Adding equities offering favorable liquidity to the portfolio is likely to favor investors seeking healthy returns.
However, one should be vigilant before investing in such stocks. While a high level of liquidity may mean that the company is paying its contributions at a faster rate than its peers, it may also suggest that it is unable to use assets competently.
Thus, one can consider the efficiency level of a company and its liquidity to identify potential winners.
Measures to identify liquid stocks
Current ratio: It measures current assets against current liabilities. This ratio is used to measure a company’s potential to honor short and long term debts. A current ratio – also known as the working capital ratio – less than 1 indicates that the business has more liabilities than assets. However, a current high ratio does not always indicate that the company is in good financial health. It is also possible that the company has not used its assets in a meaningful way. Therefore, a range of 1 to 3 is considered ideal.
Quick report: Unlike the current ratio, the Quick Ratio – also known as the “Acid Test Ratio†or “Quick Asset Ratio†– reflects a company’s ability to pay its short-term obligations. It considers stocks excluding current assets in relation to current liabilities. Like the current ratio, a fast ratio greater than 1 is desirable.
Cash ratio: This is the most conservative of the three ratios, as it takes into account cash and cash equivalents as well as funds invested versus current liabilities. It measures a company’s ability to honor current debts using the most liquid assets. While a cash ratio greater than 1 may indicate a healthy financial position, a higher number may indicate inefficiency in the use of cash.
A ratio greater than 1 is desirable at all times, but may not always represent the financial condition of a business.
Screening parameters
To pick the best of the bunch, we added asset usage – a widely used measure of a business’s efficiency – as one of the selection criteria. Asset utilization is the ratio of total sales in the last 12 months to the average of the last four quarters of total assets. Although this ratio varies from sector to sector, companies with a higher ratio than their respective sectors can be considered efficient.
To ensure that these liquid and efficient stocks have solid growth potential, we have added our exclusive Growth Style Score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Use of assets above the industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks rank equal to # 1 (Only stocks with a strong buy rating can pass). You can see The full list of today’s Zacks # 1 Rank stocks here.
Growth score less than or equal to B (The back-tested results show that stocks with a Growth score of A or B when combined with a rank 1 or 2 of Zacks easily beat other stocks.)
These criteria reduced the universe from over 7,700 stocks to just six.
Here are four of the six actions that qualified the screen:
Based in Menomonee Falls, WI, Kohl’s company (KSS – Free Report) is a department store chain that operates specialty department stores and an e-commerce site in the United States. The company offers moderately priced clothing, shoes and accessories for women, men and children, as well as beauty and home items. Kohl’s attracts middle-class consumers as it sells brand name and brand name clothing and housewares at discounted prices. As of October 30, 2021, Kohl’s operated more than 1,100 stores in 49 states, as well as online at Kohl’s.com and the Kohl’s app. Zacks’ consensus estimate for FY2021 earnings is set at $ 7.30 per share, up 21.1% in the past 60 days. Kohl’s has a growth score of A and a surprise four-quarter profit of 114.5%, on average.
Kearney, NE Loop (BKE – Free Report) is a well-known retailer that sells a wide range of private label brands and casual wear, including casual tops, denim and other bottoms, athletic wear, outerwear, accessories. and shoes. Buckle emphasizes personalized attention to its customers and offers one-on-one customer services such as free alterations, layaways and a loyalty program. Zacks’ consensus estimate for its 2021 earnings is $ 4.76 per share, up 12.3% in the past 60 days. The company has a growth score of B and a surprise four-quarter profit of 42.8%, on average.
Based in Phoenix, AZ, Cavco Industries (CVCO – Free Report) designs and manufactures prefabricated housing structures. The company’s products are sold under brands such as Cavco Homes, Palm Harbor Homes, Friendship Homes, Fleetwood Homes, Fairmont Homes, and Chariot Eagle, among others. Cavco Industries is a leading producer of recreational park vehicles, vacation cabins and modular homes. Zacks’ consensus estimate for 2022 is set at $ 13.71 per share, up 17.2% in the past 60 days. The company has a growth score of A and a surprise four-quarter profit of 30.5%, on average.
Based in Colorado Springs, CO, Casinos of the Century (CNTY – Free Report) is a well-known casino entertainment company. The company’s activities are mainly located in the United States and Canada. Century Casinos owns a 66.6% stake in Casinos Poland through its Austrian subsidiary. Zacks’ consensus estimate for 2021 earnings is set at 75 cents per share, up 25% in the past 60 days. The company has a growth score of A and a surprise four-quarter profit of 758.9% on average.
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Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance
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