The liquidity position of a company often indicates whether it is running its business in the direction. Favorable liquidity may help a company to witness strong business growth, which in turn may positively impact its price performance. Liquidity is the measure of a company’s capability of meeting its debt obligations by converting its assets into liquid cash and equivalents.

However, one should be careful about investing in a stock with a high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to one’s portfolio.

How to Measure Liquidity?

Liquidity ratios – current, quick and cash ratios – are considered as popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company’s capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company’s potential to meet its short- as well as long-term debt obligations, a company’s quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only its short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.

On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company’s potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquid levels.      

Screening Parameters

Besides considering ideal ranges of liquidity ratios, we have added asset utilization to our screening parameters with an objective to screen the efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered to be one of the popular means of identifying efficient companies.  

In order to make our strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.

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 or better than #2
(Only Strong Buy and Buy rated stocks can get through.) 

Growth Style Score equal to A

(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.)

Just these few criteria have narrowed down the universe of over 7,700 stocks to only 30.

Here are five stocks from the list:

Nxstage Medical, Inc. develops, manufactures and markets innovative systems for the treatment of end-stage renal disease, or ESRD, and acute kidney failure. The company has an average four-quarter positive earnings surprise of 46.3%. It carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana Inc. (HUM Quick QuoteHUM - Free Report) is a health services company that facilitates the delivery of health care services through networks of providers. This Zacks Rank #2 (Buy) company has an average four-quarter positive earnings surprise of 1.9%.

Motorola Solutions, Inc. (MSI Quick QuoteMSI - Free Report) is engaged in providing communication equipments, software and services. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 15.7%.

Evercore Partners Inc. (EVR Quick QuoteEVR - Free Report) is a leading investment banking boutique providing advisory services to prominent multinational corporations. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 18.3%.

NTN Buzztime, Inc. is a leading developer, publisher and distributor of interactive entertainment. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 23.4%.

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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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