Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than the net profit margin.
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 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 six of the 18 stocks that qualified the screen:
SYNNEX Corporation ( SNX Quick Quote SNX - Free Report) is a leading business process services company. The company provides a comprehensive range of distribution, logistics and integration services for the technology industry and outsourced services focused on customer engagement to a broad range of enterprises. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised upward to $12.25 from $10.75 in 30 days’ time. Herc Holdings, Inc. ( HRI Quick Quote HRI - Free Report) is an equipment rental supplier across North America and in international markets. This Zacks Rank #2 stock has a VGM Score of A. The Zacks Consensus Estimate of $1.88 for the current-year earnings has been revised upward by 8 cents over the past seven days. Flexible Solutions International Inc. ( FSI Quick Quote FSI - Free Report) is an environmental company focusing on the research, development and manufacturing of products that save water and energy. At present, this Zacks #2 Ranked player has a VGM Score of A. The Zacks Consensus Estimate of 36 cents for the ongoing-year earnings has moved up 3 cents over the past seven 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 3.5% north to $9.36 in the past 30 days. 360 DigiTech, Inc. ( QFIN Quick Quote QFIN - Free Report) offers digital consumer finance platform. The company provides online consumer finance products to prime, underserved borrowers funded primarily by its funding partners. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings has been revised upward to $2.79 from $2.32 in 60 days’ time. L.B. Foster Company ( FSTR Quick Quote FSTR - Free Report) is engaged in the manufacture, fabrication and distribution of rail and trackwork, piling, highway products and tubular products. The stock carries a Zacks Rank of 2 and has a VGM Score of B, at present. The Zacks Consensus Estimate of 70 cents for this year’s earnings moved up by couple of cents over the past 30 days.
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Disclosure: Performance information for Zacks' portfolios and strategies are available at: . https://www.zacks.com/performance/