5 Highly Efficient Stocks That Stand Out on Key Profitability Ratios

Efficiency level measures a company’s capability to transform available input into output, and is often considered an essential parameter for gauging its potential to generate profits. A company with a high efficiency level is expected to provide stellar returns, as it is believed to be positively correlated with price performance.

However, at times, it becomes difficult to measure the efficiency level of a company. This is why one must consider the popular efficiency ratios listed below while selecting stocks.

The stocks of United Natural Foods UNFI, Northrim BanCorp NRIM, Lightspeed POS LSPD, Ulta Beauty ULTA and Electromed ELMD made it through the screening process:

These efficiency ratios are:

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 shows 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 four-quarter average of total assets. Like the above ratios, high asset utilization may indicate that a company is efficient.

Inventory Turnover: The ratio of the 12-month cost of goods sold (COGS) to a four-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 has resulted in excess inventory.

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 operating expenses. Hence, a high value of the ratio may indicate that the company manages its operating expenses more efficiently than its peers.

Screening Criteria

In addition to the above-mentioned ratios, we have added a favorable Zacks Rank — Zacks Rank #1 (Strong Buy) — to the screen to make this strategy more profitable. You can see the complete list of today’s Zacks #1 Rank stocks here.

Inventory Turnover, Receivables Turnover, Asset Utilization, and Operating Margin greater than the 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 16.

Here are the top five stocks that made it through the screen:

United Natural Foods

United Natural Foods is the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. UNFI has an average four-quarter earnings surprise of 52.10%.

Northrim BanCorp

Northrim BanCorp is a full-service commercial bank that provides a full range of personal and business banking services. NRIM has an average four-quarter earnings surprise of 19%.

Lightspeed POS

Lightspeed POS provides a one-stop commerce platform for merchants. LSPD has an average four-quarter earnings surprise of 17.9%.

Ulta Beauty

Ulta Beauty is a leading beauty retailer in the United States. ULTA has an average four-quarter earnings surprise of 15.7%.

Electromed

Electromed manufactures, markets and sells products that provide airway clearance therapy to patients with compromised pulmonary function. ELMD has an average four-quarter earnings surprise of 13.6%.

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This article originally published on Zacks Investment Research (zacks.com).

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