Given the near-term economic uncertainty surrounding the COVID-19 outbreak, investors have shifted their focus from growth stocks to stocks that have the balance sheets and liquidity to weather the current downturn.
Assuming the economy returns to normal at some point in the relatively near future, the name of the game by then might just be survival.
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Balance sheet analysis
For investors, the safest place is stocks with lots of cash and relatively low debt on their balance sheets. Quick Ratio and Current Ratio are two popular ways for traders to measure liquidity.
Current ratio is a measure of a company’s ability to pay off short-term debts and obligations within one year. Mathematically, the current ratio is a company’s current assets divided by its current liabilities. Current assets include all assets that could reasonably be converted to cash within one year, such as marketable securities, prepaid expenses and inventory.
Quick report is a very similar metric for measuring short-term liquidity. To calculate the quick ratio, first add up a business’s cash, cash equivalents, current accounts receivable, and short-term investments. Take this sum and divide it by the current liabilities to get the quick ratio. The main difference between the Quick Ratio and the Current Ratio is that the Quick Ratio only includes assets that could be converted to cash within 90 days, such as cash and cash equivalents, marketable securities, and accounts receivable.
Stocks with current ratios and rapid ratios greater than 3 are considered relatively liquid.
Debt is another factor to consider when finding businesses that are well equipped to deal with the economic crisis of COVID-19. Rather than just looking at debt, the debt ratio is a common way to measure a company’s financial leverage. The higher the debt ratio, the more a business depends on debt to do business. The debt ratio is simply the total liabilities of a business divided by the total equity.
See also: What does it mean that the stock market is a leading economic indicator?
Debt and Liquidity Screen
Benzinga looked at all S&P 500 companies looking for stocks with fast and current ratios above 3 and long and short-term debt ratios below 0.1. Here are the 10 actions that made the cut:
IPG Photonics Corporation (NASDAQ: IPGP)
Skyworks Solutions Inc (NASDAQ: SWKS)
Arista Networks Inc (NYSE: DILL)
ABIOMED, Inc. (NASDAQ: ABMD)
Incyte Company (NASDAQ: INCY)
Intuitive Surgical, Inc. (NASDAQ: ISRG)
Facebook, Inc. (NASDAQ: FB)
Regeneron Pharmaceuticals Inc (NASDAQ: REGN)
Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX)
Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG)
Benzinga’s point of view
The current ratio, the quick ratio, and the debt to equity ratio can give a quick glimpse into the health of a company’s balance sheet, but they are just three measures of a company’s health. To get the full picture of a business, smart investors incorporate all available information and dozens of financial metrics into their analysis of a stock.
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