Efficiency level assesses a company’s capability to transform usable input into output, and is commonly 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 Repsol REPYY, TechnipFMC FTI, Telefonica Brasil VIV and USA Compression Partners USAC 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 18.
Here are the top four stocks that made it through the screen:
Repsol
Repsol explores, develops and produces crude oil products and natural gas, transports petroleum products and liquified petroleum gas and refines petroleum. REPYY has an average four-quarter earnings surprise of 18.7%.
TechnipFMC
TechnipFMC is a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry. FTI has an average four-quarter earnings surprise of 15.9%.
Telefonica Brasil
Telefonica Brasil is engaged in providing communication, information and entertainment solutions in the telecommunication sector, in the State of Sao Paulo. VIV has an average four-quarter earnings surprise of 7.7%.
USA Compression Partners
USA Compression Partners is one of the largest independent natural gas compression service providers in the United States, measured by fleet horsepower. USAC has an average four-quarter earnings surprise of 1.2%.
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Telefonica Brasil S.A. (VIV): Free Stock Analysis Report
TechnipFMC plc (FTI): Free Stock Analysis Report
Repsol SA (REPYY): Free Stock Analysis Report
USA Compression Partners, LP (USAC): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).