The financial strength criterion of Benjamin Graham, the father of value investing, tells that if investors go for stocks whose current ratio exceeds 2 and which have more working capital than long-term debt, their search will likely uncover high-quality companies to add to their portfolios.
The current ratio indicates whether the balance sheet provides the company with sufficient margins to pay off its short-term creditors. The ratio is a quotient where total current assets are the numerator and total current liabilities are the denominator.
When the difference between total current assets and total current liabilities (aka working capital) exceeds the long-term debt, it signals that the balance sheet of the company is solid. Thus, resources are sufficient to hold activities and refund the lenders of capital.
One company I found by searching these criteria in GuruFocus's All-in-One Screener was Intuitive Surgical Inc (NASDAQ:ISRG). Based in Sunnyvale, California, the company is the designer, manufacturer and marketer of the da Vinci surgical systems and other medical instruments and accessories.
Intuitive Surgical has a current ratio of 4.64, which is better than the industry median of 2.39. The current ratio is ranked higher than 489 out of a total of 637 competitors operating in the Medical Devices & Instruments industry.
The GuruFocus chart below shows that Intuitive Surgical's trailing 12-month working capital was $3.5 billion and its trailing 12-month long-term debt was $0 as of Dec. 30, 2018.
GuruFocus assigned the topmost rating of 10 out of 10 for the company's financial strength and a very high rating of 9 out of 10 for its profitability.
Shares of Intuitive Surgical closed at $580.81 on Thursday for a market capitalization of $67.13 billion. The stock has a price-book ratio of 8.64 versus the industry median of 3.03 and a price-sales ratio of 16.33 compared to the industry median of 3.47.
Wall Street issued an overweight recommendation rating for shares of Intuitive Surgical with an average target price of $615.46 per share, reflecting a 6% upside.
The second company I researched using the above criteria was Shopify Inc. (NYSE:SHOP). Headquartered in Ottawa (Ontario), Canada, the company provides small and mid-sized companies with a cloud-based multi-channel commerce platform.
The stock has a current ratio of 11.21, which tops the industry median of 1.76. The current ratio of Shopify is ranked higher than 2,039 out of a total of 2,108 peers operating in the software industry.
According to GuruFocus, as of the last quarter of fiscal 2018 which ended on Dec. 28, the trailing 12-month working capital of Shopify was nearly $2 billion and its long term debt was $0.
GuruFocus assigned a high rating of 8 out of 10 for the company's financial strength but a low rating of 3 out of 10 for its profitability.
Shares of Shopify closed at $363.59 on Thursday for a market capitalization of $42.09 billion. The stock has a price-book ratio of 14.66 versus the industry median of 2.82 and a price-sales ratio of 28.4 versus the industry median of 2.14.
Wall Street issued an overweight recommendation rating for shares of Shopify with an average target price of $363.88.
The third company I looked at was CoStar Group Inc. (NASDAQ:CSGP). The company is headquartered in Washington, DC and provides the American and British commercial real estate industries with online marketplaces as well as information and analytics services.
CoStar Group has a current ratio of 7.6, which is much better than the industry median of 1.7. CoStar Group is topping 1,569 out of a total of 1,706 competitors operating in the real estate industry in terms of a better current ratio.
Based on the chart below, as of the last quarter of 2018, CoStar Group's trailing 12-month working capital was $1.06 billion and its trailing 12-month long-term debt was $0.
Moreover, GuruFocus assigned high ratings of 9 out of 10 for the company's financial strength and 8 out of 10 for its profitability.
Shares of CoStar Group closed at $591.29 on Thursday for a market capitalization of $21.6 billion. The stock has a price-book ratio of 6.63 versus the industry median of 0.91 and a price-sales ratio of 16.29 versus the industry median of 2.6.
Wall Street issued a recommendation rating of 1.9 for shares of CoStar Group and has established an average target price of $642. The recommendation rating falls between 1 (strong buy) and 2 (buy).
Disclosure: I have no positions in any securities mentioned.
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This article first appeared on GuruFocus.