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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 meet all its operating and non-operating costs and 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 typically 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 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 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 more than 7,705 stocks to only 15.
Here are four of the 15 stocks that qualified the screening:
Wyndham Hotels & Resorts, Inc. WH is a hotel franchisor that operates through Hotel Franchising and Hotel Management segments. Its 12-month net profit margin is 8.4%.
Tronox Holdings plc TROX is a manufacturer of TiO2 pigment across various parts of the world. Its 12-month net profit margin is 31.5%.
Riot Blockchain, Inc. RIOT is engaged in cryptocurrency mining operation in North America. Its 12-month net profit margin is 44.5%.
MainStreet Bancshares, Inc. MNSB is the bank holding company for MainStreet Bank. Its 12-month net profit margin is 35.4%.
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 backtest 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.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 4 tickers for taking advantage of it. If you don’t buy now, you may kick yourself in 2022.
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Tronox Holdings PLC (TROX): Free Stock Analysis Report
Riot Blockchain, Inc. (RIOT): Free Stock Analysis Report
MainStreet Bank (MNSB): Free Stock Analysis Report
Wyndham Hotels & Resorts (WH): Free Stock Analysis Report
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