The liquidity of a stock is an important parameter that investors should consider while adding stocks to their investment portfolio. Liquidity primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents.

These stocks have always been in demand owing to their potential to provide maximum returns. However, one should be alert enough before investing in such stocks. While a high liquidity level may imply that the company is clearing its dues faster than peers, it may also indicate that the company is failing to use its assets efficiently.

Hence, one may consider a company’s efficiency level in addition to its liquidity for identifying prospective winners.

Measures to Identify Liquid Stocks

Current Ratio: It measures current assets relative to current liabilities. The ratio gauges a company’s potential to meet short- and long-term debt obligations. A current ratio — the working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always suggest that the company is in good financial shape. It may also indicate that the firm failed to utilize its assets significantly. Hence, a range of 1-3 is considered ideal.

Quick Ratio: Unlike the current ratio, the quick ratio —the ‘acid-test ratio’ or ‘quick assets ratio’ — indicates a company’s ability to pay short-term obligations. It considers inventory, excluding the current assets relative to current liabilities. A quick ratio of more than 1 is desirable, like the current ratio.

Cash Ratio: This is the most conservative ratio among the three, considering cash and cash equivalents and invested funds relative to current liabilities. It measures a company’s ability to meet existing debt obligations using the most liquid assets. Though a cash ratio of more than 1 may suggest sound financials, a higher number may indicate inefficiency in cash utilization.

A ratio greater than 1 is always desirable but may not always represent a company’s financial condition.

Screening Parameters

To pick the best of the lot, we have added asset utilization — a widely-used measure of a company’s efficiency — as one of the screening criteria. Asset utilization is the ratio of total sales in the past 12 months to the last four-quarter average of total assets. Though this ratio varies across industries, companies with a ratio higher than their respective industries can be considered efficient.

To ensure that these liquid and efficient stocks have solid growth potential, we have added our proprietary Growth Style Score to the screen.

Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)

Asset utilization more significant than the industry average (Higher asset utilization than the industry average indicates a company’s efficiency.)

Zacks Rank equal to #1 (Only Strong Buy-rated stocks can get through).

Growth Score less than or equal to B (Back-tested results show that stocks with a Growth Score of A or B handily beat other stocks when combined with a Zacks Rank #1 or 2.)

These criteria have narrowed the universe of more than 7,700 stocks to only four.

Here are four stocks that qualified for the screen:

Dr. Reddy’s Laboratories Limited RDY is an integrated global pharmaceutical company providing affordable and innovative medicines since 1984. The company markets its products in the United States, the U.K., Germany, India, Russia, Venezuela, Romania and South Africa. Dr. Reddy’s beat earnings and sales estimates in first-quarter fiscal 2024, driven by new product launches. It has been witnessing healthy growth across its branded and global generics markets, especially in North America, EU and Emerging markets. Additionally, Dr. Reddy’s has a strong generic pipeline, with ANDA and drug master filings expected to roll out in future quarters. The company recently divested non-core brands to focus on its core business, which is encouraging. The Zacks Consensus Estimate for RDY’s fiscal 2024 bottom line is pegged at $3.74 per share, up 9.7% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 39.6%, on average.

Surmodics Inc SRDX is a leading provider of medical device and In Vitro Diagnostics (IVD) technologies to the healthcare industry. It reports through two segments — Medical Devices and IVD. Surmodics’ top line in second-quarter fiscal 2023 was driven by robust revenues from its Medical Device arm. Strong thrombectomy suite and efforts to boost research and development augur well. A strong liquidity position is an added plus. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at a loss of $1.06 per share compared with a loss of $1.85 60 days ago. SRDX has a Growth Score of A and a trailing four-quarter earnings surprise of 71.2%, on average.

Fluor Corporation FLR provides engineering, procurement, construction and maintenance services (EPCM) through several subsidiaries. Fluor also provides operation and maintenance services to major industrial clients. The company’s second-quarter earnings and revenues increased year over year, given the solid demand for its engineering and construction solutions. Substantial contributions from the Energy Solutions and Urban Solutions segments aided the results. Fluor’s total new awards rose compared with the year-ago period. New awards also demonstrate that clients are moving forward with capital spending plans in a challenging business environment. Given the strong underlying performance of the company’s non-legacy portfolio and large Energy Solutions projects, Fluor lifted its expectations for 2023. The Zacks Consensus Estimate for Fluor’s 2023 earnings has been revised upward to $1.87 per share from $1.74 in the past 60 days. The company has a Growth Score of B.

GigaCloud Technology GCT provides end-to-end B2B e-commerce solutions for big parcel merchandise worldwide. The company’s marketplace brings together manufacturers (located mostly in Asia) with resellers (located in United States, Asia and Europe) to implement cross-border transactions. The Zacks Consensus Estimate for its 2023 bottom line is pegged at $1.59 per share, suggesting an improvement of 14.4% in the past 60 days.  GCT has a Growth Score of A.
Dr. Reddy’s Laboratories Ltd (RDY): Free Stock Analysis Report

Fluor Corporation (FLR): Free Stock Analysis Report

Surmodics, Inc. (SRDX): Free Stock Analysis Report

GigaCloud Technology Inc. (GCT): Free Stock Analysis Report

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