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.
Ponce Financial Group PDLB, Credo Technology Group CRDO, Interface TILE, Ciena CIEN and Citizens Financial Services CZFS 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 15.
Our Choices
Here are the top five stocks that made it through the screen:
Ponce Financial Group
Ponce Financial Group is the financial holding company for Ponce Bank. PDLB has an average four-quarter earnings surprise of 43.46%.
Credo Technology
Credo Technology offers high-speed connectivity solutions. CRDO has an average four-quarter earnings surprise of 27.35%.
Interface
Interface is the world's largest manufacturer of modular carpet. TILE has an average four-quarter earnings surprise of 26.75%.
Ciena
Ciena is a leading provider of optical networking equipment, software and services. CIEN has an average four-quarter earnings surprise of 19.45%.
Citizens Financial Services
Citizens Financial Services is the bank holding company for First Citizens National Bank. CZFS has an average four-quarter earnings surprise of 10.45%.
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Ciena Corporation (CIEN): Free Stock Analysis Report
Interface, Inc. (TILE): Free Stock Analysis Report
Citizens Financial Services Inc. (CZFS): Free Stock Analysis Report
Ponce Financial Group, Inc. (PDLB): Free Stock Analysis Report
Credo Technology Group Holding Ltd. (CRDO): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).