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Investors rely on net profit margin to pick stocks that ensure maximum returns from the portfolio. Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same reveals how well a company is run and the headwinds confronting it.
A higher net margin reflects the company’s efficiency at converting sales into actual profit.
Net Profit Margin = Net profit /Sales * 100.
In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. 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.
Moreover, a higher net profit margin as compared to peers lends a competitive edge.
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 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 four of the six stocks that qualified the screen:
Luxembourg-based Aperam (APEMY - Free Report) is a renowned manufacturer and retailer of stainless, and specialty steel products. The stock has a VGM score of ‘A’. Moreover, 2017 earnings estimates increased 3.5% to $3.88 per share over the last 60 days.
Notably, Aperam’s year-to-date return of 8.8% is better than the Zacks Steel Producers industry’s gain of 3.2%.
France-based Arkema SA (ARKAY - Free Report) is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. The stock has a VGM score of ‘A’. Moreover, 2017 earnings estimates rose 4.8% to $7.41 per share over the last 60 days.
Notably, Arkema’s one-year return of 30.6% is higher than the Zacks Chemicals Diversified industry’s increase of 17.9%.
Chicago-based SP Plus Corporation (SP - Free Report) provides professional parking, ground transportation, facility maintenance, security, and event logistics services to property owners and managers in the real estate industry. The stock has a VGM score of ‘A’. Last quarter, the company posted an average positive earnings surprise of 40.54%.
Moreover, 2017 earnings estimates increased 19.8% to $1.57 per share over the last 60 days. Notably, SP Plus’ one-year return of 55.6% compared favorably with the Zacks Consumer Services – Miscellaneous industry’s decline of 5.7%.
Hong Kong-based UTStarcom Holdings Corp. (UTSI - Free Report) is engaged in providing interactive Protocol based network solutions. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 narrowed from a loss of 4 cents to a penny over the last 60 days.
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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4 Solid Stocks with Impressive Net Profit Margin
Investors rely on net profit margin to pick stocks that ensure maximum returns from the portfolio. Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same reveals how well a company is run and the headwinds confronting it.
A higher net margin reflects the company’s efficiency at converting sales into actual profit.
Net Profit Margin = Net profit /Sales * 100.
In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. 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.
Moreover, a higher net profit margin as compared to peers lends a competitive edge.
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 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 four of the six stocks that qualified the screen:
Luxembourg-based Aperam (APEMY - Free Report) is a renowned manufacturer and retailer of stainless, and specialty steel products. The stock has a VGM score of ‘A’. Moreover, 2017 earnings estimates increased 3.5% to $3.88 per share over the last 60 days.
Notably, Aperam’s year-to-date return of 8.8% is better than the Zacks Steel Producers industry’s gain of 3.2%.
France-based Arkema SA (ARKAY - Free Report) is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. The stock has a VGM score of ‘A’. Moreover, 2017 earnings estimates rose 4.8% to $7.41 per share over the last 60 days.
Notably, Arkema’s one-year return of 30.6% is higher than the Zacks Chemicals Diversified industry’s increase of 17.9%.
Chicago-based SP Plus Corporation (SP - Free Report) provides professional parking, ground transportation, facility maintenance, security, and event logistics services to property owners and managers in the real estate industry. The stock has a VGM score of ‘A’. Last quarter, the company posted an average positive earnings surprise of 40.54%.
Moreover, 2017 earnings estimates increased 19.8% to $1.57 per share over the last 60 days. Notably, SP Plus’ one-year return of 55.6% compared favorably with the Zacks Consumer Services – Miscellaneous industry’s decline of 5.7%.
Hong Kong-based UTStarcom Holdings Corp. (UTSI - Free Report) is engaged in providing interactive Protocol based network solutions. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 narrowed from a loss of 4 cents to a penny over the last 60 days.
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 »