Current Ratio Analysis

Current Ratio Education Combined With Zacks Analysis By: Kevin Matras



Current Ratio is 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 the stocks in the S&P 500 is 2.09. This is a nice improvement from mid-year when it was at 1.75; and an even bigger improvement from the beginning of the year when it was at 1.67.

Screening for this is quite easy to do.

It's a ratio, so on any stock screener programs, including the Zacks 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. But please keep in mind variables like the individual companies and industry outlook are far more important than its current ratio in moving stock prices.

Screen Parameters. Below is just one example.

■Zacks Ranks = 1
(Only 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
(I only want positive projected growth rates.)

■Price >= $5

■Volume >= 100,000

Here are 5 stocks that passed this week’s screen:
BLK - Snapshot Report BlackRock, Inc.
CBT - Snapshot Report Cabot Corp.
FIRE - Snapshot Report Sourcefire, Inc.
ISRG - Analyst Report Intuitive Surgical, Inc.
VRX - Snapshot Report Valeant Pharmaceuticals

Note: Current Ratio Analysis is only one of many financial ratio's and I'd say you would only use this as a confirmation of your investment choice based on economic and industry outlooks combined with the more important earnings and revenue outlook for the company you are considering investing into.