Liquidity of a stock is an important parameter that many investors tend to ignore. It primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents.
These stocks have always been in demand owing to their potential to provide maximum returns. However, one should be alert enough before investing in such stocks. While a high liquidity level may imply that the company is clearing its dues at a faster rate compared with peers, it may also indicate that the company is failing to use its assets judiciously.
Hence, one may consider a company’s efficiency level in addition to its liquidity for identifying prospective winners.
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 11.
Here are four of the 11 stocks that qualified the screen:
San Jose, CA-based Synaptics SYNA is a leader in designing and marketing human interface solutions, such as touchpads for notebook computers, capacitive touch screen controllers for handsets and biometric fingerprint sensors for mobile devices. The company has a Growth Score of A and a trailing four-quarter positive surprise of 29.19%, on average. The Zacks Consensus Estimate for fiscal 2020 earnings has been stable at $4 in the past 30 days.
Based in Luxembourg,MagnaChip Semiconductor Corp. MX designs, manufactures and sells analog and mixed-signal semiconductor platform solutions for communications, Internet of Things, consumer, industrial and automotive applications. The Zacks Consensus Estimate for 2020 bottom line has moved 91% north to 65 cents in the past 30 days. The company has a Growth Score of A and average four-quarter positive earnings surprise of 134.26%.
Headquartered in San Diego, CA, Tandem Diabetes Care, Inc. TNDM designs, develops and markets products for people with insulin-dependent diabetes. The company has a Growth Score of A and its four-quarter positive earnings surprise is 66.69%, on average. The Zacks Consensus Estimate for 2020 earnings of 3 cents has been revised a penny upward in the past 30 days.
Domiciled in Miami, FL, International Money Express, Inc. IMXI is a software-as-a-service company focused on customer service and engagement, offering an array of products and services. The company has an impressive Growth Score of A and average four-quarter beat of 12.16%. The Zacks Consensus Estimate of $1.02 for 2020 has been constant over the past 30 days.