A profitable company’s biggest success lies in providing big returns to its investors even after meeting all its operating and non-operating costs. If a profitable company has weak fundamentals it might weigh on the performance of its stock. However, studies have shown that a highly profitable company generally brings significant gains for investors.
Here we have used the concept of accounting ratios to evaluate a company’s profitability. There are a variety of profitability ratios, from which we have chosen the most common and successful profitability 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 revenue. Using net income ratio, one can determine a company’s effectiveness to pay for its operating and non-operating expenses from its revenue. A higher net income ratio usually implies a company’s ability to generate ample revenue and successfully manage all its 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: 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 7,890 stocks to only eight.
Here are five of the eight stocks that qualified the screen:
SRC Energy Inc. (SRCI - Free Report) is involved in the acquisition, development and production of oil and natural gas properties. It has an average four-quarter positive earnings surprise of 49.9%.
NMI Holdings, Inc. (NMIH - Free Report) is a private mortgage guaranty insurance services provider. It has an average four-quarter positive earnings surprise of 11.7%.
ConnectOne Bancorp, Inc. (CNOB - Free Report) is a bank holding company for ConnectOne Bank. It has an average four-quarter positive earnings surprise of 18.7%.
Tencent Holdings Limited (TCEHY - Free Report) is an investment holding company. It has an average four-quarter positive earnings surprise of 4.4%.
RSP Permian, Inc. (RSPP - Free Report) is an independent oil and natural gas company. It has an average four-quarter positive earnings surprise of 31.9%.
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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