Current Ratio

By: Kevin Matras
June 30, 2009

This week, I’m focusing on another ratio to help gauge a company’s financial health: the Current Ratio.

It is calculated by dividing current assets by current liabilities. The higher the ratio the better, since that means the company has more liquid assets to meet its short-term obligations. A ratio of 2 or more (meaning a company has at least twice as many short-term assets than short-term liabilities) is generally considered good. Currently, the average current ratio for the stocks in the S&P 500 is 1.75. (This is an improvement from the beginning of the year when it was 1.67.)

Not surprisingly, the Finance Sector (as applied to companies with over 50,000 shares traded on a daily basis) has one of the worst Current Ratios with a median of .99. This is actually a bit worse than back in January when it was at 1.06.

How to Use:
Screening for this is quite easy to do. It’s a ratio, so on any of our screeners, including the Research Wizard, you’d want to first go to “Ratios”. And then go to the “Liquidity and Coverage” section. From there, you’ll find an item called “Current Ratio”. That’s the one. As for what value to use, I prefer to compare a stock’s Current Ratio to the median for its Industry.

And in this week’s screen, were doing just that. We’ll also add in some other items to help us find sound companies with solid prospects for the future.

Screen Parameters
* Zacks Ranks less than or equal to 2
(Only Buys and Strong Buys allowed.)
* Current Ratio > median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)
* Current ratio > 2
(And at the very least, we want the companies to exceed the commonly-held definition of good, which means greater than 2.)
* Projected 1 Yr. Growth Rate > median for its respective X Industry
(This means we’re looking for the companies with the best growth rates within their groups.)
* Projected 1 Yr. Growth Rate > 0
(And I only want positive projected growth rates.)
* Price >= $5
* Volume >= 100,000

Here are 5 stocks that passed this week’s screen:
CHRW – Snapshot Report C.H. Robinson Worldwide, Inc.
CHTT – Snapshot Report Chattem, Inc.
HMSY – Snapshot Report HMS Holdings Corp.
SONE – Snapshot Report S1 Corp.
SYNT – Snapshot Report Syntel, Inc.

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.