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5 Liquid Stocks with Solid Growth Potential

Liquidity of a company is one of the key indicators of its financial health. A company with a higher level of liquidity can convert its assets into cash to pay short-term debt obligations faster than those with a lower level of liquidity. Several studies show that investing in shares of companies with high liquidity bears the potential of higher-than-market returns.

However, ample liquidity can also mean that the company is failing to utilize its assets efficiently. Hence, it is also important to find out whether a company with high liquidity is efficient or not. A combination of efficiency and liquidity can whip up a good opportunity for strong returns.

Liquidity Ratios

Liquidity ratios – 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 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 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 excluded current assets relative to current liabilities. Like current ratio, 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 only looks toward a company’s ability to pay current debt obligations using most liquid assets. Though cash ratio higher than 1 may point to a company’s sound financials, a high number may indicate inefficiency in using cash.

As evident, a ratio of greater than 1 is always desirable but 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 called 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, stocks with high ratios may indicate inefficient companies.)    

Asset utilization greater than industry average
(Higher asset utilization than industry average indicates a company’s efficiency.)

Zacks Rank equal to #1
(Only Strong Buy rated stocks can get through.) 

 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.)

Just these few criteria narrow down the universe of over 7,700 stocks to only 8.

Here are five stocks that meet these criteria: 

Sonus Networks, Inc. (SONS)  

Netgear Inc. (NTGR)

Manhattan Associates, Inc. (MANH)

Silicon Laboratories Inc. (SLAB)

Gaming and Leisure Properties, Inc. (GLPI)

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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: http://www.zacks.com/performance.

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NETGEAR INC (NTGR): Free Stock Analysis Report
 
SONUS NETWORKS (SONS): Free Stock Analysis Report
 
MANHATTAN ASOC (MANH): Free Stock Analysis Report
 
SILICON LAB INC (SLAB): Free Stock Analysis Report
 
GAMING AND LEIS (GLPI): Free Stock Analysis Report
 
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