Regardless of market conditions, companies with favorable efficiency levels are more likely to be investors’ choice. The reason is that 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 21.

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

Toll Brothers TOL builds single-family detached and attached home communities. Toll Brothers has an average four-quarter positive earnings surprise of nearly 31.4%.

SPX Technologies, Inc. SPXC is a diversified supplier of highly engineered products and technologies, holding positions in the HVAC and detection and measurement markets. SPX Technologies has an average four-quarter positive earnings surprise of 30.8%.

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

Extreme Networks EXTR is a leading provider of next-generation switching solutions that meet the increasing needs of enterprise local area networks, Internet service providers and content providers. Extreme Networks has an average four-quarter positive earnings surprise of 10.4%.
The Sherwin-Williams Company (SHW): Free Stock Analysis Report

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

Extreme Networks, Inc. (EXTR): Free Stock Analysis Report

SPX Technologies, Inc. (SPXC): Free Stock Analysis Report

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