Companies with favorable efficiency levels are expected to see upward movement in stock prices. This is because efficiency level is believed to have a direct relationship with the price performance of a stock. Efficiency, a company’s ability to transform its inputs into outputs, is a potential indicator of a company’s financial health.
Key Ratios to Identify Efficiency
Sometimes it becomes difficult to measure the efficiency level of a company. This is the reason why one must consider popular efficiency ratios while selecting stocks. These efficiency ratios are:
Inventory Turnover: The ratio of 12-month cost of goods sold (COGS) to a 4-quarter average inventory is considered one of the most popular efficiency ratios. It indicates a company’s ability to maintain a suitable inventory position. While a high value indicates that the company has a relatively low level of inventory compared to COGS, a low value indicates that the company is facing declining sales, which resulted in excess inventory.
Receivables Turnover: This is the ratio of 12-month sales to four-quarter average receivables. It shows a company’s potential to extend its credit and collect debt in terms of that credit. A high receivables turnover ratio or the “accounts receivable turnover ratio” or “debtor’s turnover ratio” is desirable as it signals that the company is capable of collecting its accounts receivables or that it has quality customers.
Asset Utilization: This ratio indicates a company’s capability to convert assets into output and is thus a widely known measure of efficiency level. It is calculated by dividing total sales over the past 12 months by the last 4-quarter average of total assets. Like the above ratios, high asset utilization may also indicate that a company is efficient.
Operating Margin: This efficiency measure is the ratio of operating income over the past 12 months to sales over the same period. It measures a company’s ability to control its operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.
In addition to the above-mentioned ratios, we have added a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) to the screen with an objective to make this strategy more profitable.
Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than industry average
(Values of these ratios higher than industry averages may indicate that the efficiency level of the company is higher than its peers.)
The use of these few criteria narrowed down the universe of over 7,906 stocks to only 19.
Here are four stocks from the 19 that made it through the screen:
Kaiser Aluminum Corp. (NASDAQ:KALU) manufactures and sells semi-fabricated specialty aluminum mill products. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 17.2%.
Community Bank System, Inc. (NYSE:CBU) is a bank holding company. The company owns two subsidiaries: Community Bank, N.A. (CBNA or the Bank) and Benefit Plans Administrative Services, Inc. (BPAS). This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 10.1%.
Nova Measuring Instruments Ltd. (NASDAQ:NVMI) provides metrology solutions for the semiconductor manufacturing industry. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 21.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sherwin-Williams Co (NYSE:SHW) is engaged in the development, manufacture, distribution and sale of paint, coatings and related products. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 3%.
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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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