A company with strong profitability is able to meet all its business-related expenses and offer satisfactory returns for its investors.A profitable company with weak fundamentals may have some shortcomings, but multiple studies indicate that a company with significant profitability is a good investment choice.
Here, we have used ratio analysis to evaluate the profitability of a company. There are mainly four vital profitability ratios, which are gross income ratio, operating income ratio, pre-tax profit margin and net income ratio.
From these, we have selected net income ratio, which is the most widely used and transparent profitability ratio.
The 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 seven stocks that qualified the screening:
j2 Global Inc (JCOM) provides cloud-based communications and storage messaging services. j2 Globaloperates through two segments, Digital Media and Business Cloud Services.It has an average four-quarter earnings surprise of 2.5%.
Applied Optoelectronics Inc (AAOI) develops and manufactures advanced optical devices, packaged optical components, optical subsystems, laser transmitters and fiber optic transceivers.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%.
Rice Midstream Partners LP (RMP) is a midstream energy company. It owns, operates, develops and acquires midstream assets in the Appalachian Basin. It has an average four-quarter earnings surprise of 70.9%.
Preferred Bank (PFBC) is one of the largest independent commercial banks in California focusing on the Chinese-American market. It has an average four-quarter earnings surprise of 5.1%.
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.
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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