A company with a favorable efficiency level is expected to provide stellar returns as it is believed to be positively correlated with price performance. In fact, efficiency level, which measures a company’s capability to transform available input into output, is often considered an important parameter for gauging its potential to make profits.

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 21.

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

Dillard’s DDS is a large departmental store chain featuring fashion apparel and home furnishings. Dillard’s has an average four-quarter positive earnings surprise of 77.1%.

The Andersons ANDE is a regional grain merchandiser with diversified businesses. The Andersons has an average four-quarter positive earnings surprise of 64.4%.

Shift4 Payments FOUR is a provider of integrated payment processing and technology solutions. Shift4 Payments has an average four-quarter positive earnings surprise of 21.9%.

Ingersoll Rand IR is a global industrial company, with expertise in industrial and mission-critical flow creation technologies. Ingersoll Rand has an average four-quarter positive earnings surprise of nearly 14.9%.
The Andersons, Inc. (ANDE): Free Stock Analysis Report

Dillard’s, Inc. (DDS): Free Stock Analysis Report

Ingersoll Rand Inc. (IR): Free Stock Analysis Report

Shift4 Payments, Inc. (FOUR): 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.