The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding a company’s shareholders.
Net profit margin is an effective tool for measuring the profits reaped by a business. A higher net margin underlines a company’s efficiency to translate sales into actual profits. Moreover, this metric lends an insight into how well a company is run and what are the headwinds weighing on it.
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 of a company’s operations and its cost-control measures.
Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric not only attracts investors but also draws well-skilled employees who eventually enhance a business’ value.
Moreover, a higher net profit margin compared with its peers provides the company 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 important for technology companies.
In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.
Furthermore, 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, while analyzing 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 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 stock. Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment. You can see . the complete list of today’s Zacks #1 Rank stocks here Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential. VGM Score of A or B:
Here are five of the 13 stocks that qualified the screen:
Griffon Corporation ( GFF Quick Quote GFF - Free Report) is a diversified management and holding company engaged in manufacturing home and building products, consumer and industrial products, and defense electronics products. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.52 for fiscal 2020 earnings has been revised 76.7% upward over the past 30 days. CBIZ, Inc. ( CBZ Quick Quote CBZ - Free Report) provides professional business services that help clients better manage their finances and employees. The company offers financial, insurance, and advisory services across the United States and Canada. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.31 for 2020 earnings has been revised upward from $1.11 in the past 30 days. Systemax Inc. ( SYX Quick Quote SYX - Free Report) is a direct marketer of brand name and private label products, including personal desktop computers, notebook computers, computer related products, and industrial products, in North America and Europe. At present, the stock carries a Zacks Rank of #2 and has a VGM Score of A. The Zacks Consensus Estimate for the current-year earnings has moved 21.8% north to $1.34 in the past 30 days. Carriage Services, Inc. ( CSV Quick Quote CSV - Free Report) is a leading provider of death-care services and products in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate of $1.55 for the ongoing year’s earnings moved up 15 cents over the past 30 days. Deckers Outdoor Corporation ( DECK Quick Quote DECK - Free Report) is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities. At present, the stock carries a Zacks Rank of #2 and has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2021 earnings moved 10% north to $9.04 in the past 30 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/