Efficiency level measures a company’s capability to transform available input into output and is often considered an important parameter for gauging its potential to make profits. A company with a high efficiency level is expected to provide stellar returns as it is believed to be positively correlated with price performance.
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.
To that end, Vince Holding VNCE, YPF Sociedad Anonima YPF, Interface TILE, TechnipFMC FTI and Arlo Technologies ARLOmade 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 inventory level 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 11.
Our Picks:
Here are the top five stocks that made it through the screen:
Vince Holding offers a broad range of women's and men's ready-to-wear, including its signature cashmere sweaters, leather jackets, luxe leggings, dresses, silk and woven tops, denim and footwear. VNCE has an average four-quarter earnings surprise of 84.3%.
YPF Sociedad Anonima is an international energy company based on the integrated business of hydrocarbons. It is focused on Latin America, with high standards of efficiency, profitability and responsibility. YPF has an average four-quarter earnings surprise of nearly 76.1%.
Interface is the world's largest manufacturer of modular carpets, which it markets under the Interface and FLOR brands. TILE has an average four-quarter earnings surprise of 73.3%.
TechnipFMC is a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry. FTI has an average four-quarter earnings surprise of 39.3%.
Arlo Technologies designs products, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities, focusing on delivering a seamless, smart home experience. ANF has an average four-quarter earnings surprise of 14.7%.
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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.
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