A company’s ability to provide good returns to its investors even after meeting all its business-related costs and expenses can be measured using profitability analysis. A fundamentally strong company generally has a high level of profitability. In this respect, we have used an accounting ratio to evaluate the profitability position of a company and identify a profitable company over a loss-making one.
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 7,874 stocks to only 15.
Here are five of the 15 stocks that qualified the screen:
Align Technology, Inc. (ALGN - Free Report) is a designer of clear aligner therapy, intraoral scanners, and CAD/CAM digital services. It has an average four-quarter positive earnings surprise of 20.7%.
Momo Inc. (MOMO - Free Report) is an operator of a mobile-based social networking platform. It has an average four-quarter positive earnings surprise of 17.2%.
Tokyo Electron Limited (TOELY - Free Report) is a developer of semiconductor and flat panel display production equipment. It has an average four-quarter positive earnings surprise of 28%.
SolarEdge Technologies, Inc. (SEDG - Free Report) is a designer of direct current optimized inverter systems for solar photovoltaic installations. It has an average four-quarter positive earnings surprise of 29.1%.
Atlas Air Worldwide Holdings, Inc. (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services globally. It has an average four-quarter positive earnings surprise of 22.9%.
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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