Finding Profitable Companies
with Net Income Ratios

Using net income can prove to be an advantage to any screening system, specifically the use of "growth in net income". If the company's revenue is constantly growing it shows good company health. This should also be reflected in the price pattern.

Looking for net income growth is an easy job, but we should first mention the difference between revenue and net income. Even though a company may have a growing revenue they could actually be running a deficit. Net income is revenue after expenses. When screening for a company based on income (revenue or net income) this difference should be taken into account since the type of companies returned in the screen are very different.

The reasoning behind looking for companies which have growing net income is that they should show a growth in stock price. In the sample screens below we can see the actual historical net income of the company for the last 4 years. In each case, we are comparing the current year's net income to that of one of the historical years (2-4). Net income should grow from year 4 to year 1, as well, we are interested in the % growth exhibited by each year.

It's important to note that the ratios are year 1 vs year 2, year 1 vs year 3 and year 1 vs year 4. This is how we search for a growing ratio. The revenue should grow more from year 4 to 1 than year 2 to 1. In the case of our first screen I have used a 2 year ratio of 1.25, 3 year ratio of 1.5 and a 4 year ratio of 1.75 (experiment with these numbers). In other words, the revenue grew by 75% from year 1 to year 4 (or the ratio from year 4 reported earnings and year 1 reported earning has grown by 75%).The revenue grew 50% since year 3, and 25% from year 2. The average growth per year should be greater or equal to 25% per year for last 4 years.

In the screen below I have included the actual net revenue (year 1,2,3,4) greater than 1 million since I am interested in companies that are profitable. Without this criteria I could have returned companies with growing net revenue with the net being negative (ie: a deficit). There are no technical conditions in this screen. I have also included a minimum dividend payout since without this criteria the screen returned over 300 results.

When looking at the results screen, several things should be highlighted as can be seen in the image below. On the StockScreener you can sort the results by clicking on any of the column headers.

(Note: the results were sorted by lowest dividend payment first)

Once this is done, the next step is to look at the charts to see if the timing is correct.

This screen is for a long term traders perspective since we are looking for growth over years. If you are a swing trader or day trader, it is always an advantage to consider up-trending stocks, and in theory, stocks with rising net income should also have a rising price value.

Let's look at the 5 year charts of three of the results.

COKE:
net income year 1, 30.7 million,
net income year 2, 22.82 million,
net income year 3, 9.47 million,
net income year 4, 6.29 million.

UBMT:
net income year 1, 4.72 million,
net income year 2, 2.96 million,
net income year 3, 2.38 million,
net income year 4, 2.00 million.

KMI:
net income year 1, 381.7 million,
net income year 2, 304.18 million,
net income year 3, 238.64 million,
net income year 4, 151.98 million.

If I sort the results list starting with the highest reported dividend, I end up with similar stocks. Almost every company's stock price on this list has grown over the last 5 years.

If you experiment with the criteria values you will get quite a lot of interesting results. When looking at these stocks, it would be worthwhile to look at their projected earnings as well to help predict future price growth.

Good luck and may the trend be with you.