Profitability analysis is considered one of the best possible ways to assess the prospects of a company. This analysis is used to identify a profitable company from a loss-making one. In this context, it can be inferred that a profitable company generally has a high level of sales surplus, which will help it meet all its operating and non-operating costs and still offer high returns.
In this context, it may be wise to invest in shares of a company with a high level of profitability as it normally ensures high returns. As a result, the simplest and most transparent way of checking a company’s profitability is by using accounting ratios. There are a variety of profitability ratios. We have selected net income ratio here as it is the most useful and simplest profitability metric.
Net Income Ratio
Gross income ratio, operating income ratio, pretax profit margin and net income ratio can be used to find out a company’s profit generating abilities. But net income ratio is widely accepted as the most conservative of the above-mentioned ratios.
Net income in simple words is total earnings a company makes after deducting all the expenses from its sales revenues. Net income ratio or net profit margin is a ratio of a company’s net income and sales. A high net income ratio shows that the company is able to effectively manage all its business activities, including production, administration, selling, etc.
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: No matter whether the market is good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
Trailing 12-Month Sales and Net Income Growth Higher than X Industry: Stocks that have witnessed higher-than-industry sales and net income growth in the past 12 months are positioned to perform well.
Trailing 12-Month Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
Percentage Rating Strong Buy greater than 70: This indicates that 70% of the current broker recommendations for the stock are Strong Buy.
These few parameters narrowed down the universe of over 6,813 stocks to only six.
Here are four of the six stocks that qualified the screen:
ACM Research, Inc. (ACMR - Free Report) is a supplier of wafer cleaning technologies for advanced semiconductor devices. Its 12-month net profit margin is 16.6%.
SLM Corporation (SLM - Free Report) is the owner and operator of a saving, planning and paying for college company. Its 12-month net profit margin is 24.3%.
1-800-FLOWERS.COM, Inc. (FLWS - Free Report) is a provider of gourmet food and floral gifts. Its 12-month net profit margin is 3.3%.
New Oriental Education & Technology Group Inc. (EDU - Free Report) is a provider of private educational services under the New Oriental brand. Its 12-month net profit margin is 11.5%.
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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.