Benjamin Graham, the father of value investing, suggested that investors screen for stocks with a current ratio of more than 2 and a higher working capital than long-term debt if they wanted to have better chances of finding high-quality companies.
These companies have the potential to largely beat their average competitor, regardless the business cycle’s phase.
The current ratio, which is calculated as total current assets divided by total current liabilities, weighs the ability of the company to satisfy its short-term creditors.
The working capital ratio, which is calculated as total current assets minus total current liabilities, measures the ability of the company to continue to operate its business without bumps and to satisfy all its creditors.Â
Below are some stocks that satisfy these requirements. Sell-side analysts also recommend either to adjust these positions according to an overweight rating or to buy them, sustaining expectations for higher share prices. The overweight recommendation rating means that the stock is foreseen to outperform either its industry or the entire market within 12 months.
Splunk Inc.Â
Headquartered in San Francisco, Splunk Inc. (SPLK, Financial) produces software that is used to search, investigate, monitor and analyze big data generated by computers without human intervention.
The company has a current ratio of 3.06 as of July 28, which is above the industry median of 1.75.
Splunk’s current ratio is ranked higher than 1,690 competitors out of a total of 2,279 companies operating in the application software industry.
According to GuruFocus, as of July 28, Splunk’s working capital of $2.1 billion is higher than its long-term debt & capital lease obligation of approximately $1.9 billion.
Shares of Splunk Inc. closed at $110.95 on Friday at a market capitalization of about $17.12 billion. The stock has a price-book ratio of 11.64 compared to the industry median of 2.75 and a price-sales ratio of 8.07 versus the industry median of 2.31.
Wall Street issued an overweight recommendation rating for shares of Splunk with an average target price of $148.49.
Keysight Technologies, Inc.
Based in Santa Rosa, California, Keysight Technologies, Inc. (KEYS, Financial) manufactures electronics tests and measurement equipment and produces electronic design automation software for aerospace/defense, computer, industrial, semiconductor and telecommunications industries. Keysight Technologies was spun off from Agilent Technologies, Inc. (A) in 2014.
Keysight Technologies has a current ratio of 2.05 as of July 28, which is over the industry median of 1.89.
The current ratio is ranked higher than 1,214 competitors out of a total of 2,196 companies operating in the computer hardware industry.
The GuruFocus chart shows Keysight Technologies had approximately $1.5 billion in working capital, exceeding $1.3 billion in long-term debt & capital lease obligation as of July 28.
Shares of Keysight closed at $98.26 on Friday at a market capitalization of about $18.43 billion. The stock has a price-earnings ratio of 60.65 versus the industry median of 17.33 and a price-sales ratio of 4.43 compared to the industry median of 0.99.
Wall Street recommends buying shares of Keysight Technologies with an average target price of $108.30.
Arista Networks, Inc.
Based in Santa Clara, California, Arista Networks, Inc. (ANET, Financial) is a developer, marketer and distributor of cloud networking solutions for North American and international markets.
As of June 29, Arista Networks has a current ratio of 5.77 versus the industry median of 1.89 as it tops 2,009 peers out of a total of 2,196 companies operating in the computer hardware industry.
According to the most recent figures of the quarter ended on June 30, Arista's working capital was $2.5 billion, outclassing total debt of approximately $104.4 million.
Moreover, GuruFocus assigned a very high score of 9 out of 10 for the company’s financial strength and for its profitability and growth.
Shares of Arista Networks closed at $239.43 on Friday at a market capitalization of $18.35 billion. The stock has a price-earnings ratio of 26.66 versus the industry median of 17.33 and a price-sales ratio of 8.22 versus the industry median of 0.99.
Wall Street issued an overweight recommendation rating for shares of Arista Networks with an average target price of $290.46.
Disclosure: I have no positions in any securities mentioned.
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