Benjamin Graham, the father of value investing, suggested looking for stocks that have a current ratio higher than 2 and more working capital than long-term debt.
When the current ratio is higher than 2, the company has been able to produce more than enough liquidity to pay back its short-term creditors. The ratio is calculated as total current assets divided by total current liabilities.
When the working capital surpasses the long-term debt substantially, it means the business will likely be able to continue to honor its long-term debt obligations. The working capital is the difference between total current assets and total current liabilities.
Thus, investors may want to consider the following stocks since they meet the above criteria.
Sensient Technologies
The first stock to consider is Sensient Technologies Corp. (SXT, Financial), a Milwaukee, Wisconsin-based global provider of colors, flavors and other specialty ingredients mainly to food, beverage, personal care, household, pharmaceutical and nutraceutical industries.
The stock has a current ratio of 3.60 versus the industry median of 1.92.
Sensient Technologies has a trailing 12-month working capital of about $525.63 million versus long-term debt of $518 million as of the most recent fiscal year.
GuruFocus assigned a rating of 5 out of 10 to the company's financial strength.
The share price was $88.87 at close on Friday for a market capitalization of $3.75 billion and a 52-week range of $53.42 to $89.97.
Wall Street sell-side analysts issued a median recommendation rating of overweight and an average target price of about $96.75 per share for the stock.
Ambarella
The second stock to consider is Ambarella Inc. (AMBA, Financial), a Santa Clara, California-based designer of semiconductor solutions for video that enables high-definition and ultra-HD compression as well as image processing and deep neural network processing. The company has customers all over the world.
The stock has a current ratio of 7.26, exceeding the industry median of 2.28.
Ambarella has a trailing 12-month working capital of about $423.33 million and no long-term debt as of the most recent fiscal year.
GuruFocus assigned a rating of 7 out of 10 to the company's financial strength.
The stock closed around $98.65 on Friday for a market capitalization of $3.58 billion and a 52-week range of $45.101 to $137.2099.
Wall Street sell-side analysts issued a median recommendation rating of overweight and an average target price of $133 per share for the stock.
Relay Therapeutics
The third stock to consider is Relay Therapeutics Inc. (RLAY, Financial), a Cambridge, Massachusetts-based clinical-stage biotech developer of precision medicines for the treatment of advanced solid tumors.
The stock has a current ratio of 46.16, which is more compelling than the industry median of 5.78.
Relay Therapeutics has a trailing 12-month working capital of $756.47 million and no long-term debt as of the most recent fiscal year.
GuruFocus assigned a rating of 7 out of 10 to the company's financial strength.
The stock traded around $33 per share at close on Friday for a market capitalization of $3.06 billion and a 52-week range of $26.44 to $64.37.
Wall Street sell-side analysts issued a median recommendation rating of buy and an average target price of $54.83 per share for the stock.
Vir Biotechnology
The fourth stock to consider is Vir Biotechnology Inc. (VIR, Financial), a San Francisco-based clinical-stage biotech developer of therapeutic products for the treatment and prevention of serious infectious diseases, including hepatitis B virus, influenza A virus, human immunodeficiency virus and tuberculosis. The company also holds manufacturing agreements for the development of potential Covid-19 treatments.
The stock has a current ratio of 5.91, versus the industry median of 5.78.
Vir Biotechnology has a trailing 12-month working capital of about $673.31 million and no long-term debt as of the most recent fiscal year.
GuruFocus assigned a rating of 6 out of 10 to the company's financial strength.
The stock was trading around $42.39 at close on Friday for a market capitalization of $5.54 billion and a 52-week range of $25.31 to $141.01.
Wall Street sell-side analysts issued a median recommendation rating of overweight and an average target price of $70.43 per share for the stock.
