Will this stock soar after reporting rising profitability?

Should you pile into this company after a positive update?

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Touch sensor manufacturer Zytronic (LSE: ZYT) has released an upbeat trading update today. It shows that the company is making good progress and its underlying profit is expected to be significantly ahead of last year.

This is good news for the company’s investors, since Zytronic’s financial performance will reflect the impact of a £0.9m non-cash provision which arises from its foreign exchange policy. However, even taking this into account, Zytronic is on track to perform at least as well as market expectations. This is because of a continuation in the second half of the year of the trend, which was reported in the first half of the year. Touch screen revenues increased relative to both traditional products and on a year-on-year basis.

Looking ahead, Zytronic is forecast to increase its bottom line by 5% in the current year and by a further 3% next year. While neither figure is particularly impressive, Zytronic’s sound financial standing and strategy mean that it offers strong growth potential over the medium-to-long term.

Furthermore, Zytronic has significant income potential. At the present time it yields 3.4%, but dividends are forecast to rise by almost 10% in the next financial year. This puts Zytronic on a forward yield of 3.8%, which for a smaller company is hugely appealing. In addition, Zytronic’s dividend is covered almost twice by profit. This shows that it’s a relatively stable income stock, but also that dividends could rise at a faster pace than profit and not put the company’s financial position into difficulties.

Value for money

Of course, other industrial stocks also have investment appeal. For example, metrology company Renishaw (LSE: RSW) is expected to return to growth following a challenging 2016 financial year. Its bottom line is forecast to rise by 16% this year and with it having a price-to-earnings (P/E) ratio of 19.6, this equates to a price-to-earnings growth (PEG) ratio of 1.9. This indicates that Renishaw offers good value for money. That’s especially the case when Zytronic’s PEG ratio stands at a rather unappealing 3.1.

However, Renishaw’s yield of 1.8% means that it lacks income appeal. Certainly, it’s well covered by profit at 2.2 times and this indicates that dividend growth is on the horizon. However, Renishaw lacks the stability of Zytronic when it comes to financial performance. As mentioned, Renishaw’s profitability was disappointing last year and it declined by 43%. In fact, Renishaw’s net profit was only 8% higher last year than it was in 2011.

This contrasts with Zytronic, which has been able to grow its earnings by 34% in the last five years. Looking ahead, both stocks have bright futures, but Zytronic’s added income appeal makes it the better buy right now. That’s especially the case since it arguably offers a more stable earnings outlook, too.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Zytronic. The Motley Fool UK has recommended Renishaw. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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