A company’s efficiency level shows how well it turns its resources, such as labor, capital and assets, into profits and business output. It is one of the most important measures of a company’s financial strength and profit-generating ability. Companies with higher efficiency levels usually manage their operations better, reduce costs and generate stronger returns, making them more likely to deliver solid long-term stock performance.
However, at times, it becomes difficult to measure the efficiency level of a company. This is why one must consider the popular efficiency ratios listed below while selecting stocks.
The stocks of CelesticaCLS, Zurn Elkay Water Solutions CorpZWS, Lam ResearchLRCX, BE Semiconductor IndustriesBESIY and Johnson Controls InternationalJCI made it through the screening process.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
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:
Celestica
Celestica is one of the largest electronics manufacturing services companies in the world, primarily serving original equipment manufacturers, cloud-based and other service providers and enterprises from several industries. CLS has an average four-quarter earnings surprise of 7.7%.
Zurn Elkay Water Solutions Corp
Zurn Elkay Water Solutions Corp. supplies a range of advanced water system solutions. ZWS has an average four-quarter earnings surprise of 7.6%.
Lam Research
Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. LRCX has an average four-quarter earnings surprise of 7.1%.
BE Semiconductor Industries
BE Semiconductor Industries designs, develops, manufactures, markets and services die sorting, flip chip die-attach, molding, trim and form, singulation and plating systems for the semiconductor industry's assembly operations. BESIY has an average four-quarter earnings surprise of 7.1%.
Johnson Controls International
Johnson Controls International is a diversified technology company and a multi-industrial leader, with customers spanning over 150 countries. JCI has an average four-quarter earnings surprise of 6.2%.
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