Screen of the Week: Current Ratio

By Kevin Matras
March 09, 2010

This week, I’m focusing on another ratio to help gauge a company’s financial health, and that’s the Current Ratio. It’s calculated by dividing current assets by current liabilities. The higher the ratio, the better; meaning 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 stocks in the S&P 500 is 1.79. (This is off a bit from the current ratio of 1.91 from Q3 of last year, but above the 1.67 at the beginning of 2009. So it’s actually smack dab in the middle of last year’s range.) (BTW – the Medical sector has the best current ratio with a median of 2.48, while Finance still has the worst at .98.)

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, we’re 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 greater than median for its respective X Industry
(Looking at the companies with the strongest liquid positions to meet their short-term financial obligations.)

* Current ratio greater than 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 greater than 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 greater than 0
(And I only want positive projected growth rates.)

* Price greater than or equal to $5

* Volume greater than or equal to 100,000

Here are 5 stocks that passed this week’s screen:
ALGN – Align Technology, Inc.
ARGN – Amerigon, Inc.
GES – Guess?, Inc.
GTIV – Gentiva Health Services, Inc.
UVV- Universal Corporation

Start using this financial strength ratio in your own screening to help you find the stocks best able to prosper during these tough financial times. Put these ideas and others to the test today, and start screening and backtesting your strategies before your next trade.
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.