Efficiency measures how well a company turns inputs into outputs and is a key indicator of its profit-generating potential. 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 popular efficiency ratios while selecting stocks.
GormanRupp GRC, Valmont Industries VMI and Eni E made it through the screening process.
The 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 inventory level 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 has narrowed down the universe of over 7,906 stocks to 11.
Our Choices
Here are the top three stocks that made it through the screen:
GormanRupp
GormanRupp designs, manufactures and sells pumps and related equipment. GRC has an average four-quarter earnings surprise of 17.6%.
Valmont Industries
Valmont Industries is primarily engaged in the production of fabricated metal products, metal and concrete pole and tower structures and mechanized irrigation systems in the United States and abroad. VMI has an average four-quarter earnings surprise of 6.7%.
Eni
Eni is among the leading integrated energy players in the world. E has an average four-quarter earnings surprise of 6.1%.
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Valmont Industries, Inc. (VMI): Free Stock Analysis Report
Eni SpA (E): Free Stock Analysis Report
Gorman-Rupp Company (The) (GRC): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).