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Regardless of market conditions, companies with favorable efficiency levels are more likely to be investors’ choice. The reason is that a company with a favorable efficiency level is expected to offer impressive returns as it is believed to be positively correlated to its price performance.

Notably, efficiency ratio is an indication of a company’s financial health. It analyzes how efficiently a company uses its assets and liabilities internally.

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. 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.

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

REX American Resources (REX) is engaged in the production and sale of ethanol and distillers grains. REX Technologies has an average four-quarter positive earnings surprise of 88.5%.

Consolidated Water (CWCO) is involved in the development and operation of seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent. CWCO has an average four-quarter positive earnings surprise of nearly 61.6%.

Beacon Roofing Supply (BECN) is the largest publicly traded distributor of residential and non-residential roofing materials and complementary building products in the United States and Canada. BECN has an average four-quarter positive earnings surprise of 11.1%.

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