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Semiconductor Industry Showing High Growth Potential

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Among companies trading on the New York Stock Exchange and the Nasdaq, information technology companies offer high growth potential. Two technology companies, NXP Semiconductors NV ( ) and NVIDIA Corp. ( ), have strong current and Sloan ratios . As these companies have high profitability, several gurus poured capital into tech companies during the past quarter.
Three ratios that determine asset efficiency and earnings quality
Unlike the cash conversion cycle ( ), which is a function of three days ratios , the current ratio is simply the total current assets (TCA) over the total current liabilities (TCL). However, the current ratio can still give a sense of how efficient a company turns its products into cash on hand. Healthy current ratios generally fall between - and ': if a company's TCA is less than its TCL, the company would not be able to pay off the liabilities. This can lead to issuance of debt. On the other hand, companies with current ratios over ' likely have an unbalanced ratio between current assets and current liabilities. This usually occurs due to inefficient working capital management. The quick ratio is similar to the current ratio, but excludes the company's inventory. Companies with increasing quick ratios usually have higher liquidity, and thus lower days inventory and CCCs.
The distribution of average current ratios across industries is slightly right-skewed with a median around -. Over 75% of industries have average current ratios within the "healthy range" of - to '. The distribution of average quick ratios across industries is slightly narrower than that of average current ratios, and the median average quick ratio is near -.5.

While it does not directly measure the company's efficient use of current assets, the Sloan ratio gives key information about the quality of a company's earnings. University of Michigan professor Richard Sloan researched the "accrual anomaly," a phenomenon that suggests that companies with minimal accruals outperform those with high accruals. The...


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