Companies with favorable efficiency levels are likely to be on investors’ radar irrespective of market conditions as price performance is believed to be positively correlated with efficiency. Efficiency, a company’s ability to transform its inputs into outputs, is a potential indicator of a company’s financial health.
How to Measure Efficiency?
We have considered four popular ratios in order to find efficient companies that have the potential to provide impressive returns.
Inventory level is one of the key indicators of a company’s business health. While a high inventory level may indicate that the company is going through a rough patch in terms of sales, a dwindling level may indicate that the company will run out of stock in a favorable sales condition. This is where inventory turnover comes into play. It is the ratio of 12-month cost of goods sold (COGS) to a 4-quarter average inventory. Thus, a high value of the ratio indicates a low level of inventory relative to COGS, while a low ratio signals that the company has excess inventory.
This ratio is used to measure a company’s capability to extend its credit and collect debts on the basis of that credit. Receivables turnover ratio or the “accounts receivable turnover ratio” or the “debtor’s turnover ratio” is calculated by dividing 12-month sales by four-quarter average receivables. While a high ratio indicates that the company efficiently collects its accounts receivables or has quality customers, a low ratio signals that the company has an inefficient collection procedure or has low-quality customers or an inefficient credit policy.
This is a widely used measure of a company’s efficiency. Asset utilization indicates a company’s potential to utilize its assets. It is a ratio of total sales over the past 12 months to the last 4-quarter average of total assets. So, the higher the ratio, the greater is the chance that the company is utilizing its assets efficiently. On the contrary, a low value of the ratio signals that it is failing to use its assets effectively.
Another popular efficiency ratio is operating margin. Operating profit margin, which is simply operating income over the past 12 months divided by sales over the same period, indicates how well a company is controlling its operating expenses. If a company has a high operating profit margin in relation to its competitors, it is doing a better job at controlling operating expenses.
All these ratios can be considered as effective measures if one compares different companies within a particular sector or industry. This is the reason why we have considered only those companies that have higher ratios than their respective industry averages.
In addition to the above mentioned ratios, we have added a favorable Zacks Rank – 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.)
Zacks Rank better than or equal to #2 (Buy)
(Only Zacks Rank #1 (Strong Buy) and Buy-rated stocks can get through.)
The use of these few criteria has narrowed down the universe of over 7,904 stocks to only 15. Here are five of the 15 stocks that passed the screen.
Heska Corporation HSKA develops, manufactures, and markets advanced veterinary diagnostic and specialty products for canine and feline healthcare markets in the U.S. and internationally. The company sports a Zacks Rank #1. The company has an average four-quarter positive earnings surprise of 291.54%.
Zeltiq Aesthetics Inc ZLTQ is a medical technology company. The company focuses on developing and commercializing products utilizing its controlled-cooling technology platform. Zeltiq Aesthetics has a Zacks Rank #1. The company has an average four-quarter positive earnings surprise of 12.03%. You can see the complete list of today’s Zacks #1 Rank stocks here.
YY Inc YY is a social platform that engages users in real-time online group activities through voice, video and text on personal computers and mobile devices. The company has a Zacks Rank #1. The company has an average four-quarter positive earnings surprise of 30.05%.
MaxLinear, Inc. MXL is a provider of radio frequency (RF) and mixed-signal integrated circuits for cable and satellite broadband communications and the connected home, and wired and wireless infrastructure markets. The company has a Zacks Rank #2. It has an average four-quarter positive earnings surprise of 11.71%.
Teradyne, Inc. TER supplies automation equipment for test and industrial applications. The company has a Zacks Rank #1. It has an average four-quarter positive earnings surprise of 24.85%.
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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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