Efficiency level measures a company’s capability to transform available input into output and is often considered an important parameter for gauging a company’s potential to make profits. A company with a favorable 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. These efficiency ratios are:

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 18.

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

LSI Industries LYTS is an image solutions company. LSI Industries has an average four-quarter positive earnings surprise of 61.2%.

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 positive earnings surprise of nearly 19.9%.

Caterpillar CAT is the largest global construction and mining equipment manufacturer. Caterpillar has an average four-quarter positive earnings surprise of 18.5%.

Owens Corning OC is a world leader in building materials systems and composite solutions. Owens Corning has an average four-quarter positive earnings surprise of 18.2%.

Interface TILE is the world’s largest manufacturer of modular carpets. Interface has an average four-quarter positive earnings surprise of 14.2%.
Caterpillar Inc. (CAT): Free Stock Analysis Report

Owens Corning Inc (OC): Free Stock Analysis Report

LSI Industries Inc. (LYTS): Free Stock Analysis Report

Interface, Inc. (TILE): Free Stock Analysis Report

Hubbell Inc (HUBB): Free Stock Analysis Report

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