President Donald Trump promised to lower the overall tax burden on American business in the coming weeks and the key U.S. indexes cheered up. Under Trump’s new tax plan, federal taxes will be reduced by $4.4 trillion to $5.9 trillion over a decade. Higher infrastructure spending and financial de-regulation policies should also benefit companies already with stable profitability.
Profitability analysis is one of the best methods to evaluate the pricing strategies of a company. With Trump’s economic policies expected to lower the overall operating costs of a company, profitability analysis should be used to select the best performing companies. It will not only to assess a company’s ability to generate strong returns but also meet all its business expenses.
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 and net income ratio. From these, we have chosen the most transparent and widely used net income ratio.
Using the Net Income Ratio As a Prediction Tool
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 clear 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 five of the seven stocks that qualified the screening:
Milacron Holdings Corp (MCRN) manufactures, distributes and services engineered and customized systems within the plastic technology and processing industry. It has an average four-quarter earnings surprise of 5.7%.
Rice Midstream Partners LP (RMP) is a midstream energy company. It has an average four-quarter earnings surprise of 44.5%.
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%.
Cytokinetics, Inc. (CYTK) is a late-stage biopharmaceutical company focused on discovering, developing and commercializing first-in-class muscle activators as potential treatments for debilitating diseases.It has an average four-quarter earnings surprise of more than 100%.
II-VI, Inc. (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 earnings surprise of 59.2%.
While backtesting over a two-year timeframe (Feb 06, 2015 to Feb 03, 2017), a portfolio following this strategy provided a total return of 22% compared with the S&P 500’s return of 8.5%. Thus, this strategy may prove profitable for those looking to beat the market.
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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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