Back to top

Analyst Blog

Profitability analysis is normally used to measure the pricing strategies of a company. A company which can meet all its business-related costs effectively and generate stable returns is considered profitable.

However, a profitable company with fundamental weakness may fail to offer the desired results. Several studies have indicated that a company with strong profitability is a good investment choice for return-seeking investors.

One of the best tools to measure a company’s profitability is to use ratio analysis. There are basically three key profitability ratios, namely gross income ratio, operating income ratio and net income ratio. Here, we have selected net income ratio which is the most effective and transparent of the three.

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. So, we have added a few more 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 eight stocks that qualified the screening:

II-VI Incorporated (IIVI - Free Report) designs, manufactures and markets optical and opto-electronic components, devices and materials for infrared, near-infrared, visible light, x-ray and gamma ray instrumentation. It has an average four-quarter earnings surprise of 39.8%.

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

Stamps.com Inc. (STMP - Free Report) provides easy, convenient and cost-effective Internet-based anywhere in the United States and at anytime. It has an average four-quarter earnings surprise of 66.7%.

State National Companies, Inc. (SNC - Free Report) is a specialty provider of property and casualty insurance.It has an average four-quarter earnings surprise of 21.3%.

Aegean Marine Petroleum Network Inc. (ANW - Free Report) is a marine fuel logistics company that physically supplies and markets refined marine fuel and lubricants to ships in port and at sea. It has an average four-quarter earnings surprise of 11.1%.

While backtesting over a two-year timeframe (November 07, 2014 to November 11, 2016), a portfolio following this strategy provided a total return of 17.7% compared with the S&P 500’s return of 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 »