Profitability analysis is generally used to measure a company’s ability to meet all its business-related costs and provide great returns to its investors. Although, a profitable company with weak fundamentals may fail to perform successfully, several studies have indicated that a profitable entity generally manages to offer satisfactory returns.
Here we have used the concept of accounting ratios to evaluate a company’s profitability. There are a variety of profitability ratios, from which we have chosen the most common and successful profitability metric to determine the bottom-line performance of a company.
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 revenue. A higher net income ratio usually implies a company’s ability to generate ample 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 five of the six stocks that made it through the screen:
Ferrari N.V. RACE is engaged in designing, manufacturing and selling sports cars. It has an average four-quarter positive earnings surprise of 34.9%.
Preferred Bank PFBC is a major commercial bank in California focusing on the Chinese-American market. It has an average four-quarter positive earnings surprise of 5.1%.
Applied Optoelectronics, Inc. AAOI designs and develops advanced optical devices, packaged optical components, laser transmitters, etc. It has an average four-quarterpositive earnings surprise of more than 100%.
II-VI Incorporated IIVI designs, manufactures and markets optical and opto-electronic components, devices and materials for infrared, near-infrared, visible light, x-ray and gamma ray instrumentation. It has an average four-quarter positive earnings surprise of 59.2%.
Ebix, Inc. EBIX is one of the leading international suppliers of software and e-commerce solutions to the insurance industry. It has an average four-quarter positive earnings surprise of 14.4%.
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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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Preferred Bank (PFBC): Free Stock Analysis Report
Ebix, Inc. (EBIX): Free Stock Analysis Report
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
II-VI Incorporated (IIVI): Free Stock Analysis Report
Ferrari N.V. (RACE): Free Stock Analysis Report
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