Regardless of market conditions, companies with high-efficiency levels are more likely to be investors’ choices. The reason is, a company with a favorable efficiency level is expected to offer impressive returns as it is believed to be positively correlated to its price performance.

Notably, efficiency ratio is an indication of company’s financial health. It analyzes how efficiently a company uses its assets and liabilities internally.

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.

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.

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 11.

Here are the top five stocks that made it through the screen:

JAKKS Pacific JAKK is a multi-brand company that designs and markets a broad range of toys and consumer products. JAKKS Pacific has an average four-quarter earnings surprise of 53.2%.

GMS GMS is a distributor of wallboard and suspended ceilings systems. GMS has an average four-quarter earnings surprise of nearly 9.2%.

Hubbell (HUBB) is engaged in the design, manufacture, and sale of electrical and electronic products to commercial, industrial, utility and telecommunications markets. Hubbell has an average four-quarter earnings surprise of 19.9%.

SherwinWilliams SHW is engaged in manufacturing and sales of paints, coatings and related products, primarily in North and South America. SherwinWilliams has an average four-quarter earnings surprise of 11%.

Toll Brothers TOL is a real-estate company that designs, builds, markets, sells and arranges finance for various residential communities. Toll Brothers has an average four-quarter earnings surprise of 24.4%.

The Sherwin-Williams Company (SHW): Free Stock Analysis Report

JAKKS Pacific, Inc. (JAKK): Free Stock Analysis Report

Toll Brothers Inc. (TOL): Free Stock Analysis Report

GMS Inc. (GMS): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

This article originally appeared on Zacks

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.