To increase the odds of unearthing high-quality companies, Benjamin Graham, the father of value investing, recommended investors look for stocks with a current ratio of more than two and a higher working capital than long-term debt.
These companies have the potential to largely beat their average competitor, regardless of the business cycle’s phase.
The current ratio, which is calculated as total current assets divided by total current liabilities, assesses the ability of the company to pay short-term financial obligations.
The working capital ratio, which is total current assets minus total current liabilities, measures the company’s ability to continue to operate its business without bumps and to satisfy all its creditors.
Below are some results of my search. Also, analysts on Wall Street issued recommendation ratings ranging between hold and overweight, which supports expectations for well-performing stocks. The overweight recommendation rating means the stock is expected to perform better than its industry within 52 weeks.
The first security is Hermes International SA (HESAF, Financial). Based in Paris, the company is a producer, trader and retailer of various leather goods, saddles and equestrian products, including clothes for men and women, as well as silk and textile products.
Hermes International has a current ratio of 2.89 as of June 29, which is above the industry median of 1.47.
The current ratio is ranked higher than 843 peers out of 1,022 companies operating in the retail - cyclical industry.
The GuruFocus chart shows that Hermes International’s trailing 12-month working capital was above its trailing 12-month long-term debt as of Dec. 30, 2018.
GuruFocus assigned a high rating of 8 out of 10 for the company’s financial strength and a very high rating of 9 out of 10 for its profitability.
Shares of Hermes International closed at $724 on Friday for a market capitalization of $75.64 billion. The stock has a price-book ratio of 11.94 compared to the industry median of 1.33 and a price-sales ratio of 11.53 versus the industry median of 0.55.
Wall Street issued a hold recommendation rating for shares of Hermes International.
The stock has a current ratio of 5.75 as of July 30, which tops the industry median of 1.76.
The current ratio of Guidewire Software is ranked higher than 1,873 peers out of a total of 2,084 companies operating in the software - application industry.
According to GuruFocus, as of the final quarter of fiscal 2019, which ended on July 30, Guidewire Software’s trailing 12-month working capital was $1.1 billion and it had $317 million in long-term debt.
GuruFocus assigned a very positive 7 out of 10 rating for both the company’s financial strength and its profitability.
Shares of Guidewire Software closed at $119.42 on Friday for a market capitalization of $9.86 billion. The stock has a price-book ratio of 6.21 versus the industry median of 2.76 and a price-sales ratio of 13.84 versus the industry median of 2.19.
Wall Street issued an overweight recommendation rating for shares of Guidewire.
The third security is Haemonetics Corp. (HAE, Financial). The company is a Braintree, Massachusetts-based provider of hematology products and solutions to its clients in North America, Europe, the Middle East, Africa and Japan.
As of Sept. 29, Haemonetics has a current ratio of 2.37 versus the industry median of 2.39. Haemonetics is topping 318 out of a total of 632 companies operating in the medical devices & instruments industry in terms of a better current ratio.
Based on the chart below, as of March 28, Haemonetics’ trailing 12-month working capital was $340.4 million and its trailing 12-month long-term debt was $322.45 million.
Moreover, GuruFocus assigned a positive rating of 6 out of 10 for both the company's financial strength and profitability.
Shares of Haemonetics closed at $118.31 on Friday for a market capitalization of $6 billion. The stock has a price-book ratio of 10.26 versus the industry median of 3.04 and a price-sales ratio of 6.23 compared to the industry median of 3.43.
Wall Street issued an overweight recommendation rating for shares of Haemonetics.
Disclosure: I have no positions in any securities mentioned.
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