Profitability analysis is one of the best tools to evaluate the future movement of a stock. Using profitability analysis, we can evaluate the total expenses borne and the total revenue generated by a company. High sales surplus is definitely good news for a company as it raises chance of it making more profits after meeting its costs and expenses.
In this respect, it is wise to invest in shares of a company with high level of profitability as it normally ensures high returns. However, an encouraging profitability condition may not always guarantee good returns if a company is fundamentally weak.
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, from which we have selected net income ratio here as it is the most useful and simplest profitability metric.
Net Income Ratio
There are a variety of profit ratios like gross income ratio, operating income ratio, pretax profit margin and net income ratio, which 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 revenue. Net income ratio or net profit margin is a ratio of a company’s net income and sales revenue. A high net income ratio shows that the company is able to effectively manage all its business activities, including production, administration, selling, etc.
Screening Parameters
Net income ratio is one of our key screening parameters. However, to find out the sure winners, we have added a few additional criteria to arrive at an efficient strategy.
Zacks Rank equal to #1: Only 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.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
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.
These few parameters narrowed down the universe of over 7,741 stocks to only 13.
Here are five of the 13 stocks that qualified the screen:
Johnson Outdoors Inc. JOUT is a global designer of outdoor equipment, diving, watercraft and marine electronics products. It has an average four-quarter positive earnings surprise of more than 100%.
At Home Group Inc. HOME is an operator of home decor superstores in the United States. It has an average four-quarter positive earnings surprise of 20.1%.
Inogen, Inc. INGN is a medical technology company. It has an average four-quarter positive earnings surprise of 43.7%.
Blucora, Inc. BCOR is a provider of technology-enabled financial solutions. It has an average four-quarter positive earnings surprise of 29.6%.
Weight Watchers International, Inc. WTW is a provider of weight management services globally. It has an average four-quarter positive earnings surprise of more than 100%.
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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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