The efficiency ratio serves as a vital indicator of a company's overall financial health by measuring how effectively its internal operations are being managed. Specifically, it quantifies how optimally the business deploys its assets and handles its liabilities to maximize revenues and minimize unnecessary 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.
Healthcare Services Group HCSG, Electromed ELMD, UMB Financial UMBF, Shell SHEL and MACOM Technology Solutions MTSI 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 14.
Here are the top five stocks that made it through the screen:
Healthcare Services Group
Indivior Pharmaceuticals Group provides housekeeping, laundry, linen, facility maintenance and food services to the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals. HCSG has an average four-quarter earnings surprise of 43.50%.
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 20.1%.
UMB Financial
UMB Financial provides banking services and asset servicing in the United States. UMBF has an average four-quarter earnings surprise of 17.4%.
Shell
Shell is an energy and petrochemical company, operating in Europe, Asia, Oceania, Africa, the United States, and other parts of the Americas. SHEL has an average four-quarter earnings surprise of 14.5%.
MACOM Technology Solutions
MACOM Technology Solutionsis a provider of power analog semiconductor solutions to varied markets. MTSI has an average four-quarter earnings surprise of 1.8%.
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Electromed, Inc. (ELMD): Free Stock Analysis Report
UMB Financial Corporation (UMBF): Free Stock Analysis Report
MACOM Technology Solutions Holdings, Inc. (MTSI): Free Stock Analysis Report
Healthcare Services Group, Inc. (HCSG): Free Stock Analysis Report
Shell PLC Unsponsored ADR (SHEL): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).