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Net profit margin is the most important entry in an income statement as it demonstrates the affluence of a company. It determines the efficiency of a company in deploying its resources, making it the most suitable metric for the measurement of a company’s profitability.
Net Profit Margin = Net profit /Sales * 100.
Net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. It can also be defined as the net increase in shareholder’s equity, which the company can retain as earnings or distribute among shareholders as dividend.
In fact, net profit margin can turn out to be a potent point of reference to gauge the strength in a company’s operations and cost-control measures.
Net margin helps investors assess the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.
Moreover, the strength in the metric not only attracts investors but also draws well-skilled employees who eventually add to the value of the business.
Pros and Cons
Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.
However, net profit margin as an investment criterion has its own share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that crucial for technology companies.
Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a daunting task.
Further, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective for the analysis of a company’s performance.
The Winning Strategy
A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.
Apart from these, we have added a few other criteria to ensure maximum returns from this strategy.
Screening Parameters
Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.
Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.
Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the prospects of the stock.
VGM Score of ‘A’ or ‘B’: Our research shows that stocks with a VGM Score of 'A' or 'B' when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Here are five of the nine stocks that qualified the screen:
Brazil-based Braskem SA (BAK - Free Report) produces and sells thermoplastic resins. Together with its subsidiaries, the company is the largest petrochemical operation in Latin America. The stock has a VGM score of ‘A’. Last quarter, the company beat the Zacks Consensus Estimate by 83 cents (107.79%). Moreover, 2017 earnings estimates have remained steady at $2.26 per share over the last 30 days.
Gibraltar Industries Inc. (ROCK - Free Report) manufactures and distributes products to the industrial and buildings market. The company has its headquarters at Buffalo, NY. Gibraltar outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 67.30%. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings remained steady at $1.85 per share over the last 30 days.
Hounslow United Kingdom-based International Consolidated Airlines Group S.A. (ICAGY - Free Report) is a holding company for British Airways and Iberia. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings increased 5.7% (9 cents) to $1.67 per share over the last 30 days.
International Consolidated Airlines’ three-month return of 23.6% is higher than the Zacks Transportation-Airline industry’s addition of 13.5%.
New York-based Lakeland Industries Inc. (LAKE - Free Report) manufactures and sells a comprehensive line of safety garments and accessories for the industrial and public protective clothing market. The primary markets of the company are China, European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Colombia, Mexico, Ecuador and Southeast Asia. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 remained steady at 58 cents over the last 30 days.
Lakeland’s three-month gain of 6.5% compares favorably with the Zacks Protection – Safety Equipment & Services Industry’s decline of 1.1%.
New York-based Leucadia National Corporation is a diversified holding company with interest in financial services, beef processing, oil and gas exploration and development and automobile dealerships. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings increased 4.5% (6 cents) to $1.38 per share over the last 30 days.
Leucadia’s one-year return of 39.0% beats the Zacks Diversified Operations industry’s gain of 17.6%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Stocks with Striking Net Profit Margin
Net profit margin is the most important entry in an income statement as it demonstrates the affluence of a company. It determines the efficiency of a company in deploying its resources, making it the most suitable metric for the measurement of a company’s profitability.
Net Profit Margin = Net profit /Sales * 100.
Net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. It can also be defined as the net increase in shareholder’s equity, which the company can retain as earnings or distribute among shareholders as dividend.
In fact, net profit margin can turn out to be a potent point of reference to gauge the strength in a company’s operations and cost-control measures.
Net margin helps investors assess the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.
Moreover, the strength in the metric not only attracts investors but also draws well-skilled employees who eventually add to the value of the business.
Pros and Cons
Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.
However, net profit margin as an investment criterion has its own share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that crucial for technology companies.
Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a daunting task.
Further, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective for the analysis of a company’s performance.
The Winning Strategy
A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.
Apart from these, we have added a few other criteria to ensure maximum returns from this strategy.
Screening Parameters
Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.
Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.
Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the prospects of the stock.
Zacks Rank equal to 1: In good markets or bad, stocks with a Zacks Rank #1 (Strong Buy) continue to outperform. You can see the complete list of today’s Zacks #1 Rank stocks here.
VGM Score of ‘A’ or ‘B’: Our research shows that stocks with a VGM Score of 'A' or 'B' when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Here are five of the nine stocks that qualified the screen:
Brazil-based Braskem SA (BAK - Free Report) produces and sells thermoplastic resins. Together with its subsidiaries, the company is the largest petrochemical operation in Latin America. The stock has a VGM score of ‘A’. Last quarter, the company beat the Zacks Consensus Estimate by 83 cents (107.79%). Moreover, 2017 earnings estimates have remained steady at $2.26 per share over the last 30 days.
Notably, Braskem’s one-year return of 84.3% was better than the Zacks Oil & Gas Integrated International industry’s gain of 33.3%.
Gibraltar Industries Inc. (ROCK - Free Report) manufactures and distributes products to the industrial and buildings market. The company has its headquarters at Buffalo, NY. Gibraltar outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 67.30%. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings remained steady at $1.85 per share over the last 30 days.
Gibraltar’s one-year return of 107.4% is way better than the Zacks Building & Construction Products- Miscellaneous Industry’s gain of 40.6%.
Hounslow United Kingdom-based International Consolidated Airlines Group S.A. (ICAGY - Free Report) is a holding company for British Airways and Iberia. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings increased 5.7% (9 cents) to $1.67 per share over the last 30 days.
International Consolidated Airlines’ three-month return of 23.6% is higher than the Zacks Transportation-Airline industry’s addition of 13.5%.
New York-based Lakeland Industries Inc. (LAKE - Free Report) manufactures and sells a comprehensive line of safety garments and accessories for the industrial and public protective clothing market. The primary markets of the company are China, European Economic Community (“EEC”), Canada, Chile, Argentina, Russia, Colombia, Mexico, Ecuador and Southeast Asia. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 remained steady at 58 cents over the last 30 days.
Lakeland’s three-month gain of 6.5% compares favorably with the Zacks Protection – Safety Equipment & Services Industry’s decline of 1.1%.
New York-based Leucadia National Corporation is a diversified holding company with interest in financial services, beef processing, oil and gas exploration and development and automobile dealerships. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 earnings increased 4.5% (6 cents) to $1.38 per share over the last 30 days.
Leucadia’s one-year return of 39.0% beats the Zacks Diversified Operations industry’s gain of 17.6%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »