Investors looking for high returns will likely benefit from adding stocks with sound liquidity levels, as it encourages business growth.
Liquidity measures a company’s capability to meet its short-term debt obligations. Stocks with high liquidity levels have always been in demand, owing to their potential to provide maximum returns.
Investors should be alert before considering such stocks. While a high liquidity level may imply that the company is clearing its dues faster than its peers, it may also suggest that it cannot utilize assets competently.
Hence, one may consider efficiency and liquidity to identify potential winners.
Measures to Identify Liquid Stocks
Current Ratio: It measures existing assets relative to current liabilities. The ratio gauges a company’s potential to meet short- and long-term debt obligations. A current ratio — the working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always suggest that the company is in good financial shape. It may also indicate that the firm failed to utilize its assets significantly. Hence, a range of 1-3 is considered ideal.
Quick Ratio: Unlike the current ratio, the quick ratio — the ‘acid-test ratio’ or ‘quick assets ratio’ — indicates a company’s ability to pay short-term obligations. It considers inventory, excluding the current assets relative to current liabilities. A quick ratio of more than 1 is desirable, like the current ratio.
Cash Ratio: This is the most conservative ratio among the three, considering cash and cash equivalents and invested funds relative to current liabilities. It measures a company’s ability to meet existing debt obligations using the most liquid assets. Though a cash ratio of more than 1 may suggest sound financials, a higher number may indicate inefficiency in cash utilization.
A ratio greater than 1 is always desirable but may not always represent a company’s financial condition.
To pick the best of the lot, we have added asset utilization — a widely used measure of a company’s efficiency — as one of the screening criteria. Asset utilization is the ratio of total sales in 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.
We added our proprietary Growth Style Score to the screen to ensure these liquid and efficient stocks have solid growth potential.
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.)
Asset utilization is more significant than the 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 handily beat other stocks when combined with a Zacks Rank #1 or 2.)
These criteria have narrowed the universe of more than 7,700 stocks to only seven.
Here are four of the seven stocks that qualified for the screen:
Deckers Outdoor Corporation DECK is a leading designer, producer and brand manager of innovative, niche footwear and accessories developed for outdoor sports and other lifestyle-related activities. The company sells products primarily under five proprietary brands — UGG, HOKA, Teva, Sanuk and Other brands (mainly comprised of Koolaburra). Strength in the UGG and HOKA brands is driving top-line performance. Solid gains from the direct-to-consumer (“DTC”) channels, brand growth, a strong balance sheet and a stable operating model poise Deckers well for success. It envisions fiscal 2024 net sales to increase 11% from the prior-year quarter’s levels. The Zacks Consensus Estimate for DECK’s 2024 earnings has been revised upward to $22.87 per share from $22.40 in the past 60 days. The company fiscal has a Growth Score of A and a trailing four-quarter earnings surprise of 26.3%, on average.
NVIDIA Corporation NVDA is the worldwide leader in visual computing technologies and an inventor of the graphic processing unit or GPU. The company’s performance is driven by solid revenue growth across its datacenter end market, which is gaining from increasing investments in generative AI. The company’s Datacenter business is driven by the growing adoption of cloud-based solutions amid the ever-increasing hybrid working trend. The strong demand for its chips from large cloud service and consumer internet companies bodes well. The Zacks Consensus Estimate for its fiscal 2024 bottom line is pegged at $10.74 per share, suggesting an increase of 2.7% in the past 60 days. NVDA has a Growth Score of A and a trailing four-quarter earnings surprise of 9.8%, on average.
Sprinklr CXM provides modern enterprises with a unified customer experience management platform. Sprinklr’s advanced AI-powered platform aids clients in delivering human experiences to customers all the time across all modern communication channels. The company’s client base includes companies like Microsoft, P&G and Samsung. The Zacks Consensus Estimate for its fiscal 2024 bottom line is pegged at 30 cents per share, improved from earnings of 21 cents in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 275%, on average.
Surmodics Inc SRDX is a leading provider of medical device and In Vitro Diagnostics (IVD) technologies to the healthcare industry. It reports through two segments — Medical Devices and IVD. Surmodics' strength in its thrombectomy portfolio is encouraging. Its continued efforts to improve its research and development bode well. Its sustained progress with respect to clinical trials looks promising. A strong liquidity position is an added plus. The Zacks Consensus Estimate for fiscal 2024 earnings is pegged at a loss of 22 cents per share, unchanged from 60 days ago. SRDX has a Growth Score of A and a trailing four-quarter earnings surprise of 71.2%, on average.
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Disclosure: Officers, directors and 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 mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.
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