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 six of the 23 stocks that qualified the screen:
Turning Point Brands, Inc. ( TPB Quick Quote TPB - Free Report) provides tobacco products. The company’s product consists of moist snuff, loose leaf chewing tobacco, cigarette papers, make-your-own cigar wraps and cigar smoking tobacco, cigars and liquid and tobacco vapour. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $2.68 for fiscal 2020 earnings has been revised 5.1% upward over the past seven days. Herc Holdings, Inc. ( HRI Quick Quote HRI - Free Report) is an equipment rental supplier across North America and in international markets. This Zacks Rank #1 stock has a VGM Score of B. The Zacks Consensus Estimate of $2.61 for the current-year earnings has moved up 38.8% in 30 days’ time. Carriage Services, Inc. ( CSV Quick Quote CSV - Free Report) is a leading provider of death care services and products in the United States. It offers a complete range of services relating to funerals, burials and cremations, including the use of funeral homes and motor vehicles, the performance of cemetery interment services and the management and maintenance of cemetery grounds. At present, the stock carries a Zacks Rank of #2 and has a VGM Score of A. The Zacks Consensus Estimate for the ongoing-year earnings has moved 17.4% north to $1.82 in the past 30 days. Systemax Inc. ( SYX Quick Quote SYX - Free Report) is a direct marketer of brand name and private label industrial, business equipment and supplies across the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $1.70 for 2020 earnings moved up 36 cents over the past 30 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 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 carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $1.37 for this year’s earnings has been revised upward from $1.31 in the past seven days.
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Disclosure: Performance information for Zacks' portfolios and strategies are available at: . https://www.zacks.com/performance/