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 operating and non-operating costs and still offer high returns.
Thus, it may be wise to invest in shares of a company with a high level of profitability as it normally ensures high returns. 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 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 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 and selling.
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 good market 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 well 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 6,847 stocks to only 9.
Here are five of the 9 stocks that qualified the screen:
BRP Inc. DOOO is the designer and manufacturer of powersport vehicles and marine products. Its 12-month net profit margin is 5.7%.
ACM Research, Inc. ACMR is a developer and manufacturer of single-wafer wet cleaning equipment. Its 12-month net profit margin is 16.6%.
Celsius Holdings, Inc. CELH is a developer and distributor of calorie-burning fitness beverages. Its 12-month net profit margin is 15.7%.
Sony Corporation SNE is a designer and developer of electronic equipment, instruments and devices. Its 12-month net profit margin is 9.9%.
Deckers Outdoor Corporation DECK is a retailer of footwear, apparel and accessories. Its 12-month net profit margin is 13.4%.
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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Sony Corporation (SNE) : Free Stock Analysis Report
ACM Research, Inc. (ACMR) : Free Stock Analysis Report
Deckers Outdoor Corporation (DECK) : Free Stock Analysis Report
Celsius Holdings Inc. (CELH) : Free Stock Analysis Report
BRP Inc. (DOOO) : Free Stock Analysis Report
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