Profitability analysis is one of the best ways to evaluate the prospects of a company. It is used in detecting a profitable company over a loss-making one. A company with a high level of sales surplus can not only meet all its operating and non-operating costs, but also make more profits.
In this context, it may be wise to invest in shares of a company with a high level of profitability as it normally ensures high returns. As a result, 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 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 find out 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 the 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, selling, etc.
Net income ratio is one of our key screening parameters. However, to find out the sure winners, we have added a few additional criteria to arrive at an efficient strategy.
Zacks Rank Equal to #1: No matter whether the market is good 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 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 have narrowed down the universe of more than 7,682 stocks to only 11.
Here are five of the 11 stocks that qualified the screening:
The Bancorp, Inc. (TBBK Quick QuoteTBBK ) is a financial holding company for The Bancorp Bank. Its 12-month net profit margin is 32.2%.
Hibbett, Inc. (HIBB Quick QuoteHIBB ) is an athletic-inspired fashion retailer. Its 12-month net profit margin is 10.5%.
Golden Entertainment, Inc. (GDEN Quick QuoteGDEN ) is the owner and operator of a diversified entertainment platform in the United States. Its 12-month net profit margin is 9.4%.
Devon Energy Corporation (DVN Quick QuoteDVN ) is engaged in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States. Its 12-month net profit margin is 4.2%.
Boyd Gaming Corporation (BYD Quick QuoteBYD ) is the owner and operator of 22 gaming entertainment properties located in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, Mississippi and New Jersey. Its 12-month net profit margin is 11.5%.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.