When a company has both a significant level of liquidity and profits, it is worth noting. Often this can be a sign that a company is operating effectively and has the capacity to achieve further growth. After all, liquidity provides a company with the means to make strategic moves like acquisitions or open new markets. We looked for stocks in the mid cap sector that have ample cash reserves while generating strong profits. Take a look at the list below to see if our findings inspire you to do more research.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than competitors.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a current ratio of one or less is generally a liquidity red flag. Now this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities. The quick ratio is more conservative than the Current Ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
We first looked for basic materials stocks. We next screened for businesses with strong profit margins (1-year operating margin>15%)(ROE [TTM]>30%). Next, we then screened for businesses that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We did not screen out any market caps.
Do you think these stocks are worth more than their current valuations? Use our list to help with your own analysis.
1) Terra Nitrogen Company, L.P. (TNH)
Terra Nitrogen Company, L.P. has a Operating Profit Margin of 67.41%, a Return on Equity of 128.03%, a Current Ratio of 7.62, and a Quick Ratio of 6.84. The short interest was 4.09% as of 08/18/2012. Terra Nitrogen Company, L.P. engages in the production and sale of nitrogen fertilizer products. It primarily offers anhydrous ammonia and urea ammonium nitrate solutions.
2) Nevsun Resources Ltd. (NSU)
Nevsun Resources Ltd. has a Operating Profit Margin of 74.48%, a Return on Equity of 43.88%, a Current Ratio of 5.58, and a Quick Ratio of 5.08. The short interest was 0.45% as of 08/18/2012. Nevsun Resources Ltd., a gold and base metal developer, together with its subsidiaries, engages in the exploration, development, extraction, processing, and reclamation of mineral properties in Africa. It produces gold, copper, silver, and zinc concentrates. The company's principal mineral property includes Bisha Mine, a gold, copper, and zinc deposit, which is located in Eritrea, northeast Africa.
3) Rentech Nitrogen Partners, L.P. (RNF)
Rentech Nitrogen Partners, L.P. has a Operating Profit Margin of 39.51%, a Return on Equity of 372.11%, a Current Ratio of 3.23, and a Quick Ratio of 2.81. The short interest was 4.66% as of 08/18/2012. Rentech Nitrogen Partners, L.P. engages in the production of natural gas-based nitrogen fertilizer and industrial products for agricultural uses. The company primarily offers ammonia, urea ammonium nitrate, urea granule and urea solution, nitric acid, and liquid carbon dioxide. It markets its products in the states of Illinois, Iowa, and Wisconsin.
4) RPC Inc. (RES)
|Industry:||Oil & Gas Equipment & Services|
RPC Inc. has a Operating Profit Margin of 25.52%, a Return on Equity of 41.34%, a Current Ratio of 3.58, and a Quick Ratio of 2.86. The short interest was 29.08% as of 08/18/2012. RPC, Inc. provides a range of oilfield services and equipment primarily to independent oil and gas companies engaged in the exploration, production, and development of oil and gas properties in the United States, Africa, Canada, China, eastern Europe, Latin America, the Middle East, and New Zealand. It operates in two segments, Technical Services and Support Services. The Technical Services segment offers pressure pumping, coiled tubing, snubbing, nitrogen pumping, well control consulting and firefighting, downhole tools, wireline, and fluid pumping services.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.