5 Top-Ranked Efficient Stocks With Strong Growth Potential

A company’s efficiency level reflects how effectively it uses resources such as labor, capital and assets to generate profits and drive business growth. It is a key indicator of a company’s financial strength, operational performance and ability to generate sustainable profits. 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 Wayfair W, Alarm.com ALRM, ATI INC (ATI), Farmers & Merchants Bancorp FMAO and Amerant Bancorp AMTB 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 22.

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

Wayfair

Wayfair is an online seller of home goods products, consisting of furniture and home decor. W has an average four-quarter earnings surprise of 21.5%.

Alarm.com

Alarm.com offers interactive security solutions for home and business owners. ALRM has an average four-quarter earnings surprise of 14.6%.

ATI INC

ATI INC is a diversified global specialty materials producer. ATI has an average four-quarter earnings surprise of 12.7%.

Farmers & Merchants Bancorp

Farmers & Merchants Bancorp operates as a locally owned and operated community bank serving Northwest Ohio and Northeast Indiana, providing commercial banking, retail banking and other financial services. FMAO has an average four-quarter earnings surprise of 11.4%.

Amerant Bancorp

Amerant Bancorp is a bank holding company that provides deposit, credit and wealth management services to individuals and businesses primarily in the United States, as well as select international clients. AMTB has an average four-quarter earnings surprise of 6.4%.

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This article originally published on Zacks Investment Research (zacks.com).

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