The efficiency ratio is a key indicator of a company’s overall financial health and operational performance. It evaluates how effectively management controls operating costs while generating revenues. The ratio also reflects how efficiently a business utilizes its assets and manages liabilities. A stronger efficiency ratio generally indicates better cost control, effective resource allocation, and the ability to maximize revenues while reducing unnecessary operating expenses.
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.
Polaris PII, Intrepid Potash IPI, Interface TILE, NetScout Systems NTCT and Acme United ACU have made it through the screen process:
Efficiency Ratios – to be Considered
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 Using Research Wizard:
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 23.
Here are the top five stocks that made it through the screen:
Polaris
Polarisdesigns, engineers and manufactures off-road and on-road vehicles. PII has an average four-quarter earnings surprise of 82.6%.
Intrepid Potash
Intrepid Potashis the largest producer of potash in the United States and is dedicated to the production and marketing of potash and langbeinite, another mineral containing potassium. IPI has an average four-quarter earnings surprise of 37.4%.
Interface
Interface is the world's largest manufacturer of modular carpet, which it markets under the Interface and FLOR brands. TILE has an average four-quarter earnings surprise of 29.8%.
NetScout Systems
NetScout Systemsis a leading provider of business assurance — a powerful combination of service assurance, cybersecurity, and business intelligence solutions — for today's most demanding service provider, enterprise and government networks. NTCT has an average four-quarter earnings surprise of 25.1%.
Acme United
Acme Unitedsupplies cutting, measuring, first aid, and sharpening products to the school, home, office, hardware, sporting goods, and industrial markets in the United States, Canada, Europe, and internationally. ACU has an average four-quarter earnings surprise of 17.7%.
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NetScout Systems, Inc. (NTCT): Free Stock Analysis Report
Polaris Inc. (PII): Free Stock Analysis Report
Intrepid Potash, Inc (IPI): Free Stock Analysis Report
Interface, Inc. (TILE): Free Stock Analysis Report
Acme United Corporation. (ACU): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).