Profitability analysis is used to measure the company’s ability to manage its revenues effectively and provide stunning returns to its investors. This analysis helps to detect a profitable company over a loss-making one.
The most successful way to identify a company’s profitability is by using ratio analysis. There are four important profitability ratios, namely gross income ratio, operating income ratio, pre-tax profit margin and net income ratio. Here, we have selected the most transparent 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.
Screening Parameters
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.
These few parameters narrowed down the universe of over 7,857 stocks to only eight.
