Profitability analysis is considered one of the best possible ways to assess the prospects of a company. This analysis is used to identify a profitable company from a loss-making one. In this context, it can be inferred that a profitable company generally has a high level of sales surplus, which will help it meet all its operating and non-operating costs and still offer high returns.
In this context, it may be wise to invest in shares of a company with a high level of profitability as it normally ensures high returns. As a result, the simplest and most transparent way of checking a company’s profitability is by using accounting ratios. There are a variety of profitability ratios, from which we have selected net income ratio here as it is the most useful and simplest profitability metric.
Net Income Ratio
There are a variety of profit ratios like gross income ratio, operating income ratio, pretax profit margin and net income ratio, which can be used to find out a company’s profit generating abilities. But net income ratio is widely accepted as the most conservative of the above-mentioned ratios.
Net income in simple words is total earnings a company makes after deducting all the expenses from its sales revenue. Net income ratio or net profit margin is a ratio of a company’s net income and sales revenue. A high net income ratio shows that the company is able to effectively manage all its business activities, including production, administration, selling, etc.
Net income ratio is one of our key screening parameters. However, to find out the sure winners, we have added a few additional criteria to arrive at an efficient 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 more than 6,907 stocks to only 14.
Here are four of the 14 stocks that qualified the screen:
OneMain Holdings, Inc. ( OMF Quick Quote OMF - Free Report) is a financial service holding company that engages in the consumer finance and insurance businesses. Its 12-month net profit margin is 13.6%. PennyMac Financial Services, Inc. ( PFSI Quick Quote PFSI - Free Report) is engaged in the mortgage banking and investment management activities in the United States. Its 12-month net profit margin is 42.7%. Ameris Bancorp ( ABCB Quick Quote ABCB - Free Report) is the bank holding company for Ameris Bank. Its 12-month net profit margin is 20.2%. Merchants Bancorp ( MBIN Quick Quote MBIN - Free Report) is a diversified bank holding company in the United States. Its 12-month net profit margin is 40.1%.
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