A company with strong profitability is able to meet all its business-related costs and expenses and still provide satisfactory returns to its investors. Although a fundamentally weak profitable company may face certain problems, recent studies indicate that a company with a high profitability level is a great investment choice.
Here, we have used ratio analysis to evaluate the profitability of a company. There are four vital profitability ratios, which include gross income ratio, operating income ratio, pre-tax profit margin and net income ratio. From these, we have selected net income ratio, which is the most widely used and transparent profitability 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 revenue. Using net income ratio, one can determine a company’s ability to meet operating and non-operating expenses. A higher net income ratio usually implies a company’s ability to generate ample revenues and successfully manage all its business functions.
As net income ratio is not the only indicator of future winners, 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.
These few parameters narrowed down the universe of over 7,869 stocks to only eight.
Here are five of the eight stocks that qualified the screen:
Limoneira Company (LMNR - Free Report) is an agribusiness and real estate development company.It has an average four-quarterpositive earnings surprise of 14.7%.
ABIOMED, Inc. (ABMD - Free Report) is a developer, manufacturer and marketer of medical products.It has an average four-quarterpositive earnings surprise of 8.1%.
DAQO New Energy Corp. (DQ - Free Report) is a manufacturer and seller of polysilicon and wafers.It has an average four-quarterpositive earnings surprise of 22.1%.
Ternium S.A. (TX - Free Report) is a manufacturer and processer of various steel products.It has an average four-quarterpositive earnings surprise of 20%.
Applied Optoelectronics, Inc. (AAOI - Free Report) is a designer, manufacturer and seller of fiber-optic networking products.It has an average four-quarterpositive earnings surprise of 118.3%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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.
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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.
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