A company with high profitability manages to meet all its operating and non-operating expenses and still provide high returns to its investors. In this respect, profitability analysis is used to measure the pricing strategies of a company and helps in select the top performing companies.
One of the best ways to measure a company’s profitability is ratio analysis. There are three key profitability ratios – gross income ratio, operating income ratio, pre-tax profit margin and net income ratio. From these, we have chosen the most effective and commonly used profitability ratio, net income ratio.
Net Income Ratio
Net income ratio gives us the exact profit 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 capability to bear all 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 three stocks that qualified the screening:
Applied Optoelectronics, Inc. AAOI designs and develops advanced optical devices, packaged optical components, laser transmitters, etc. It has an average four-quarter positive earnings surprise of more than 100%.
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%.
SORL Auto Parts, Inc. SORL specializes in the development, production and distribution of air brake systems and other related products. It has an average four-quarter positive earnings surprise of 38.1%.
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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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SORL Auto Parts, Inc. (SORL): Free Stock Analysis Report
Ebix, Inc. (EBIX): Free Stock Analysis Report
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
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