Liquidity of a stock is an important parameter that many investors tend to ignore. It 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 at a faster rate compared with peers, it may also indicate that the company is failing to use its assets competently/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. This ratio is used for measuring a company’s potential to meet both short- and long-term debt obligations. Thus, a current ratio — also known as working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also mean that the company has failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered ideal.

Quick Ratio: Unlike current ratio, quick ratio — also called “acid-test ratio" or "quick assets ratio" — indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater than 1 is desirable.

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

So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.

Screening Parameters

In order to pick the best of the lot, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is the ratio of total sales over 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.

In order 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 of greater than 1 are desirable, significantly high ratios may indicate inefficiency.)

Asset utilization greater than 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). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

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

Here are five of the seven stocks that qualified the screen:

Northville, MI-based Gentherm Incorporated THRM designs, develops, manufactures, and markets products utilizing innovative thermal management technologies, including climate comfort system solutions and patient temperature management systems. The Zacks Consensus Estimate for its 2021 earnings has been revised upward by 16% over the past seven days to $3.62 per share. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 71.76%, on average.

Headquartered in Santa Barbara, CA, Sonos, Inc. SONO is one of the world’s leading sound experience brands. Management announced a new line-up of exclusive artist stations and original programming coming to Sonos Radio and Sonos Radio HD. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at 78 cents per share, indicating an improvement of 533.3% from the prior-year reported figure. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 157.19%, on average.

Domiciled in Atlanta, GA, Haverty Furniture Companies, Inc. HVT is a notable retailer of retailer of residential furniture and accessories in the United States. The company also offers custom upholstery products and eclectic looks; and mattress product lines. The Zacks Consensus Estimate for 2021 earnings has been revised upward by 89.6% over the past seven days to $4.02 per share. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 63.37%, on average.

Based in Las Vegas, NV, Boyd Gaming Corporation BYD is a multi-jurisdictional gaming company, which operates primarily through three segments: Las Vegas Locals, Downtown Las Vegas, and Midwest & South. The Zacks Consensus Estimate for its 2021 earnings has been revised 52.1% upward over the past seven days to $3.24 per share. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 76.67%, on average.

Waukesha, WI-based Generac Holdings Inc. GNRC is engaged in designing, manufacturing, and selling energy storage systems, power generation equipment, among other power products for the light commercial and residential, and industrial markets globally. The Zacks Consensus Estimate for its 2021 earnings has been revised upward by 9.6% over the past seven days to $9.56 per share. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 26.11%, on average.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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Gentherm Inc (THRM) : Free Stock Analysis Report
 
Sonos, Inc. (SONO) : Free Stock Analysis Report
 
Boyd Gaming Corporation (BYD) : Free Stock Analysis Report
 
Generac Holdings Inc. (GNRC) : Free Stock Analysis Report
 
Haverty Furniture Companies, Inc. (HVT) : Free Stock Analysis Report
 
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