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 here 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 expenses from its sales revenues. Net income ratio or net profit margin is a ratio of a company’s net income and sales revenues. A high net income ratio shows that the company is able to effectively manage all business activities, including production, administration and selling.
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: 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 over 6,761 stocks to only eight.
Here are four of the eight stocks that qualified the screen:
DHT Holdings, Inc. DHT is an owner and operator of crude oil tankers. Its 12-month net profit margin is 13.8%.
Blucora, Inc. BCOR is a provider of technology-enabled financial solutions. Its 12-month net profit margin is 6.7%.
InMode Ltd. INMD is a developer and manufacturer of minimally-invasive aesthetic medical products. Its 12-month net profit margin is 39.1%.
Enphase Energy, Inc. ENPH is a designer and developer of home energy solutions for the solar photovoltaic industry. Its 12-month net profit margin is 25.8%.
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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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Enphase Energy, Inc. (ENPH) : Free Stock Analysis Report
DHT Holdings, Inc. (DHT) : Free Stock Analysis Report
Blucora, Inc. (BCOR) : Free Stock Analysis Report
InMode Ltd. (INMD) : Free Stock Analysis Report
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