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 a company with a high level of profitability as it usually 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 various profitability ratios, from which we have selected net income ratio as it is the most simple and effective measure of profitability.
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 determine 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 revenues. 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 have narrowed down the universe of more than 6,829 stocks to only 15.
Here are five of the 15 stocks that qualified the screen:
TopBuild Corp. BLD is engaged in the installation and distribution of insulation and other building products to America’s construction industry. Its 12-month net profit margin is 7.8%.
Flagstar Bancorp, Inc. FBC is a savings and loan holding company for Flagstar Bank. Its 12-month net profit margin is 16.8%.
Ready Capital Corporation RC is a real estate finance company in the United States. Its 12-month net profit margin is 6.2%.
Lithia Motors, Inc. LAD is an automotive retailer in the United States. Its 12-month net profit margin is 2.3%.
Generac Holdings Inc. GNRC is a designer and manufacturer of power generation equipment, energy storage systems, and other power products. Its 12-month net profit margin is 11.6%.
You can sign 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.
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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Lithia Motors, Inc. (LAD): Free Stock Analysis Report
Flagstar Bancorp, Inc. (FBC): Free Stock Analysis Report
Generac Holdlings Inc. (GNRC): Free Stock Analysis Report
TopBuild Corp. (BLD): Free Stock Analysis Report
Ready Capital Corp (RC): Free Stock Analysis Report
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