Back to top

Analyst Blog

A profitable company has ample sales revenue not only to meet all its operating and non-operating expenses but also to generate strong returns for investors. Although it is necessary for a profitable company to have strong fundamentals, several studies show that healthy profits usually lead to satisfactory investor returns.

Here, the profitability of the company is measured using profitability ratios. There are a variety of profitability ratios, out of which we have chosen the most widely used and easy to understand determinant – net income ratio.

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 revenue. Using net income ratio one can determine a company’s effectiveness to pay for its operating and non-operating expenses from its sales revenue. A higher net income ratio usually implies a company’s ability to generate ample sales revenue and successfully manage all its business functions.

Screening Parameters

Net income ratio is not the only indicator of future winners. As such, we have added a few additional criteria to arrive at a winning strategy.

Zacks Rank equal to #1: Only Zacks Rank #1 (Strong Buy) stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off. You can see the complete list of today’s Zacks #1 Rank stocks here . 

12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that possess higher sales and net income growth in the last 12 months showcase better financial performance.

12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.

% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.

Here are five of the 10 stocks that qualified the screening:

SPS Commerce, Inc. (SPSC - Free Report) is a provider of on-demand supply chain management solutions, providing integration, collaboration, connectivity, visibility and data analytics to its customers worldwide. It has an average four-quarter earnings surprise of 44.2%.

CryoLife Inc. (CRY - Free Report) aims to manufacture and distribute medical devices globally. It has an average four-quarter earnings surprise of more than 100%.

FormFactor Inc. (FORM - Free Report) develops, designs, manufactures, sells and supports high performance advanced semiconductor wafer probe cards. It has an average four-quarter earnings surprise of 22%.

Willdan Group, Inc. (WLDN - Free Report) is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government. It has an average four-quarter earnings surprise of 18.7%.

LegacyTexas Financial Group Inc. (LTXB - Free Report) is a bank holding company. The company's holdings include LegacyTexas Bank. It has an average four-quarter earnings surprise of 3.4%.

While backtesting over a two-year timeframe (October 24, 2014 to October 28, 2016), a portfolio following this strategy provided a total return of 29.4% compared with the S&P 500’s return of 7.4%. Thus, this strategy may prove profitable for those looking to beat the markets.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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.

Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »