The best possible way to evaluate a company’s ability to meet all operating costs and expenses and still provide excellent returns is profitability analysis. If a company has strong profitability but weak fundamentals, it might weigh on its stock performance. However, several studies highlighted that a company with high profitability normally offers considerable gains to investors.
The best accounting tool to understand a company’s profitability position is ratio analysis. Generally, there are four key profitability ratios — gross income ratio, operating income ratio, pre-tax profit margin and net income ratio. Here, we have used the most effective and frequently used profitability ratio — net income ratio.
Net Income Ratio
Net income ratio gives us the exact profit level of a company. It reflects the percentage of net income to total sales revenues. Using net income ratio, one can determine a company’s capability to meet operating and non-operating expenses with its sales revenues. A higher net income ratio usually implies a company’s ability to generate ample sales revenues and successfully manage all 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 7,904 stocks to only nine.
Here are five of the nine stocks that qualified the screen:
Sony Corporation (SNE - Free Report) is a designer of electronic equipment, instruments and devices. It has an average four-quarter positive earnings surprise of 79.8%.
Atlas Air Worldwide Holdings, Inc. (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services worldwide. It has an average four-quarter positive earnings surprise of 11%.
Mammoth Energy Services, Inc. (TUSK - Free Report) is an integrated oilfield service company. It has an average four-quarter positive earnings surprise of 14.7%.
Paycom Software, Inc. (PAYC - Free Report) is a provider of cloud-based human capital management software services. It has an average four-quarter positive earnings surprise of 30.2%.
Weight Watchers International, Inc. (WTW - Free Report) is a provider of weight management services worldwide. It has an average four-quarter positive earnings surprise of 42.2%.
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.
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 »