A company with strong profitability is not only successful in meeting all its operating and non-operating expenses but also in providing attractive returns to its investors. Although a profitable company with weak fundamentals may fail to meet its investors’ needs, multiple studies have shown that a company with solid profitability is a good investment option.
Here, we have used ratio analysis to evaluate the profitability of a company. There are mainly three key profitability ratios, namely gross income ratio, operating income ratio and net income ratio. We have selected net income ratio which is the most useful and effective.
Net Income Ratio
Net income ratio gives us the exact profitability level of a company. It reflects the percentage of net income to total sales revenue. Using net income ratio one can determine a company’s effectiveness to pay for its operating and non-operating expenses from its sales revenue. A higher net income ratio usually implies a company’s ability to generate ample sales revenue and successfully manage all its 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.
Here are four of the six stocks that qualified the screening:
Glaukos Corporation GKOS is an ophthalmic medical technology company. Glaukos develops, manufactures and markets medical devices for the treatment of glaucoma. It has an average four-quarter earnings surprise of nearly 200%.
Daqo New Energy Corp. DQ is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. It has an average four-quarter earnings surprise of more than 100%.
Calavo Growers, Inc. CVGW engages in the procurement and marketing of avocados and other perishable foods along with the preparation and distribution of processed avocado products. It has an average four-quarter earnings surprise of 11.8%.
Sucampo Pharmaceuticals, Inc. SCMP is an emerging pharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones. It has an average four-quarter earnings surprise of 35.6%.
While backtesting over a two-year timeframe (December 26, 2014 to December 30, 2016), a portfolio following this strategy provided a total return of 9.4% compared with the S&P 500’s return of 7%. Thus, this strategy may prove profitable for those looking to beat the markets.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
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 »
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Calavo Growers, Inc. (CVGW): Free Stock Analysis Report
DAQO New Energy Corp. (DQ): Free Stock Analysis Report
Sucampo Pharmaceuticals, Inc. (SCMP): Free Stock Analysis Report
Glaukos Corporation (GKOS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research