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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 due to their potential to provide maximum returns.
However, one should be careful before investing in such stocks. While a high liquidity level may mean that the company is meeting its obligations at a faster rate compared to others in its domain, it may also indicate that the company is failing to use its assets efficiently.
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
Liquidity ratios like Current Ratio, Quick Ratio and Cash Ratio are primarily used to identify companies with strong liquidity.
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 to be 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 pay 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 using the cash.
So, a ratio of greater than 1 is always desirable but it may not always underline a company’s financial health.
Screening Parameters
In order to avoid selection of inefficient companies, 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 a 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 to be efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential too, 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.)
(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 seven.
Here are five of the seven stocks that qualified the screen:
Evercore Partners Inc. (EVR - Free Report) is a leading investment banking boutique providing advisory services to prominent multinational corporations. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 15.69%. The Zacks Consensus Estimate for 2017 earnings has remained steady at $4.78 over the last 30 days.
Evercore’s one-year return of 52.3% is better than the Zacks Financial- Investment Bank industry’s gain of 47.3%.
Logitech International SA (LOGI - Free Report) designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 131.60%. Moreover, the Zacks Consensus Estimate for 2017 earnings per share has remained steady at $1.12 over the last 30 days.
San Francisco, CA-based Square Inc (SQ - Free Report) offers financial and marketing services. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 23.33%. The Zacks Consensus Estimate for 2017 has narrowed to a loss of 25 cents from 34 cents per share over the last 30 days.
Square’s one-year return of 27.3% is much better than the Zacks Internet Software industry’s gain of 9.8%.
Headquartered in Michigan, Visteon Corp. (VC - Free Report) operates as an automotive supplier engaged in the design, engineering and manufacturing of innovative climate, electronic, interior and lighting products for vehicle manufacturers. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 47.09%. The Zacks Consensus Estimate for 2017 earnings per share has increased almost 10% (50 cents) to $5.51 over the last 30 days.
Visteon gained 19.7% in the last one year compared with the Zacks Auto/Truck Original Equipment industry’s gain of 18.7%.
Zendesk Inc. provides a software-as-a-service, or SaaS, customer service platform. It provides customer service in a wide range of languages in various industries. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 12.68%. Further, the Zacks Consensus Estimate for 2017 has remained steady at a loss of 99 cents over the last 30 days.
Zendesk’s one-year return of 36.8% is better than the Zacks Internet Software industry’s gain of 9.9%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Top Liquid Stocks for a Winning Portfolio
Does your portfolio have enough liquid stocks?
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 due to their potential to provide maximum returns.
However, one should be careful before investing in such stocks. While a high liquidity level may mean that the company is meeting its obligations at a faster rate compared to others in its domain, it may also indicate that the company is failing to use its assets efficiently.
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
Liquidity ratios like Current Ratio, Quick Ratio and Cash Ratio are primarily used to identify companies with strong liquidity.
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 to be 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 pay 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 using the cash.
So, a ratio of greater than 1 is always desirable but it may not always underline a company’s financial health.
Screening Parameters
In order to avoid selection of inefficient companies, 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 a 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 to be efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential too, 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 seven.
Here are five of the seven stocks that qualified the screen:
Evercore Partners Inc. (EVR - Free Report) is a leading investment banking boutique providing advisory services to prominent multinational corporations. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 15.69%. The Zacks Consensus Estimate for 2017 earnings has remained steady at $4.78 over the last 30 days.
Evercore’s one-year return of 52.3% is better than the Zacks Financial- Investment Bank industry’s gain of 47.3%.
Logitech International SA (LOGI - Free Report) designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 131.60%. Moreover, the Zacks Consensus Estimate for 2017 earnings per share has remained steady at $1.12 over the last 30 days.
Logitech’s one-year return of 98.5% is higher than the Zacks Computer- Peripheral Equipment industry’s gain of 26.6%.
San Francisco, CA-based Square Inc (SQ - Free Report) offers financial and marketing services. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 23.33%. The Zacks Consensus Estimate for 2017 has narrowed to a loss of 25 cents from 34 cents per share over the last 30 days.
Square’s one-year return of 27.3% is much better than the Zacks Internet Software industry’s gain of 9.8%.
Headquartered in Michigan, Visteon Corp. (VC - Free Report) operates as an automotive supplier engaged in the design, engineering and manufacturing of innovative climate, electronic, interior and lighting products for vehicle manufacturers. The company has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 47.09%. The Zacks Consensus Estimate for 2017 earnings per share has increased almost 10% (50 cents) to $5.51 over the last 30 days.
Visteon gained 19.7% in the last one year compared with the Zacks Auto/Truck Original Equipment industry’s gain of 18.7%.
Zendesk Inc. provides a software-as-a-service, or SaaS, customer service platform. It provides customer service in a wide range of languages in various industries. The company has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 12.68%. Further, the Zacks Consensus Estimate for 2017 has remained steady at a loss of 99 cents over the last 30 days.
Zendesk’s one-year return of 36.8% is better than the Zacks Internet Software industry’s gain of 9.9%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »