Investors always look for companies with a high level of profitability regardless of the market condition. In this context, profitability analysis is used to identify a profitable company over a loss-making one. Profitability analysis is the best tool to measure the ability of a company to offer sturdy returns to investors even after meeting all its operating and non-operating costs.
Here, we have used the concept of accounting ratios to evaluate a company’s profitability. There is a variety of profitability ratios, from which we have chosen the most successful and frequently used metric to determine the bottom-line performance of a company.
Net Income Ratio
Net income ratio gives us the exact profitability level of a company. It reflects the percentage of net income to total sales revenues. Using net income ratio, one can determine a company’s effectiveness to meet operating and non-operating expenses from revenues. A higher net income ratio usually implies a company’s ability to generate ample revenues and successfully manage all business functions.
Net income ratio is not the only indicator of future winners. So, we have added a few more criteria to arrive at a winning strategy.
Zacks Rank Equal to #1: No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
Trailing 12-Month Sales and Net Income Growth Higher than X Industry: Stocks that have witnessed higher-than-industry sales and net income growth in the past 12 months are positioned to perform well.
Trailing 12-Month Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
Percentage Rating Strong Buy greater than 70: This indicates that 70% of the current broker recommendations for the stock are Strong Buy.
These few parameters have narrowed down the universe of over 6,804 stocks to only 16.
Here are the five of the 16 stocks that qualified the screen:
Heartland BancCorp (HLAN - Free Report) is the bank holding company for Heartland Bank. Its 12-month net profit margin is 20.4%.
Daqo New Energy Corp. (DQ - Free Report) is a manufacturer and seller of polysilicon to photovoltaic product manufactures in China. Its 12-month net profit margin is 12%.
Generac Holdings Inc. (GNRC - Free Report) is a designer and manufacturer of power generation equipment, energy storage systems, and other power products. Its 12-month net profit margin is 11.6%.
PennyMac Financial Services, Inc. (PFSI - Free Report) is engaged in mortgage banking and investment management activities in the United States. Its 12-month net profit margin is 37.8%.
Lithia Motors, Inc. (LAD - Free Report) is an automotive retailer in the United States. Its 12-month net profit margin is 2.3%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.