Investors seeking healthy returns can benefit by adding stocks with favorable liquidity levels to their portfolios. Liquidity levels are a good indicator of a company’s financial health.

Liquidity measures the company’s ability to meet short-term debt obligations by converting assets into liquid cash and equivalents.

One needs to be careful before adding such stocks to their investment portfolio. While a high liquidity level may indicate that the company is clearing its dues faster than its peers, it may also suggest that it is failing to utilize resources efficiently.

Therefore, it is advisable to consider a company’s efficiency level in addition to its liquidity for identifying potential winners. An efficient company with a favorable liquidity level may prove to be a lucrative addition to one’s portfolio.

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 short- and long-term debt obligations. A current ratio — also known as the 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 suggest that the company failed to utilize its assets significantly. Hence, a range of 1-3 is considered ideal.

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

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

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

Screening Parameters

To pick the best of the lot, we have added asset utilization — a widely-used measure of a company’s efficiency — as one of the screening criteria. Asset utilization is the ratio of total sales in 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.

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

Asset utilization greater than the 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 eight.

Here are four of the eight stocks that qualified the screen:

Dublin, Ireland-based Alkermes ALKS is a fully-integrated global biopharmaceutical company that utilizes proprietary technologies to research, develop and commercialize (with partners and on its own) pharmaceutical products to address the unmet needs of patients diagnosed with cancer and serious mental ailments. Alkermes boasts a diverse product portfolio and has a promising pipeline of candidates targeting major central nervous system (CNS) disorders, including schizophrenia, depression, addiction and multiple sclerosis. Alkermes proprietary products include Vivitrol (alcohol and opioid dependence) and Aristada (schizophrenia) among others. The Zacks Consensus Estimate for its 2021 earnings is pegged at 71 cents per share, unchanged in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 147%, on average.

Based in Austin, TX, Tesla TSLA is the market leader in battery-powered electric car sales in the United States, owning around 60% of the market share. The company’s flagship Model 3 accounts for about half of the U.S. EV market. Tesla, which garnered the reputation of a gold standard over the years, is now a bigger entity than what it started off since its IPO in 2010, with a market capitalization of almost double the combined value of the top two U.S. auto giants, General Motors and Ford. The Zacks Consensus Estimate for 2021 earnings is pegged at $6.29 per share, up 5.2% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 25.4%, on average.

Headquartered in Charlotte, NC, Nucor Corporation NUE is a leading producer of structural steel, steel bars, steel joists, steel deck and cold-finished bars in the United States. It also produces direct reduced iron (DRI) used in its steel mills. The company has 123 operating facilities, primarily in the United States and Canada. Most of its operating facilities and customers are located in North America. The Zacks Consensus Estimate for 2021 earnings is pegged at $23.30 per share, up 0.6% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 2.7%, on average.

Headquartered in San Mateo, CA, GoPro GPRO is one of the leading manufacturers of the world's most handy camera and enabler of some of the most immersive and engaging content. The company made its initial public offering in June 2014. GoPro manufactures mountable and wearable capture devices such as action cameras and related accessories. Its core product is the HERO line of capture devices, which was initially launched in 2009. Some of the company’s notable products include HERO7 Silver, HERO7 Black, HERO8 Black waterproof cameras and MAX — a 360-degree waterproof camera. The Zacks Consensus Estimate for 2021 earnings is pegged at 85 cents per share, up 1.2% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 90%, 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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