Net profit, also referred to as the bottom line, is one of the key tools that determines the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red (net loss).
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 businessvalue.
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 19 stocks that qualified the screen:
Schweitzer-Mauduit International, Inc. ( SWM Quick Quote SWM - Free Report) is a leading global provider of engineered solutions & advanced materials. The stock currently sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $3.74 for current-year earnings has moved up 13 cents over 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 flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.70 for 2020 earnings moved 36 cents north in the past 30 days. WidePoint Corporation ( WYY Quick Quote WYY - Free Report) is a technology-based provider of products and services to the government sector and commercial markets. WidePoint specializes in providing systems engineering, integration and information technology services. This Zacks Rank #1 stock has a VGM Score of A. The Zacks Consensus Estimate of 30 cents for ongoing-year earnings has been revised upward by 10 cents in 30 days’ time. Aviat Networks, Inc. ( AVNW Quick Quote AVNW - Free Report) , previously known as Harris Stratex Networks, Inc., is a global supplier of wireless network solutions and network management software, backed by a suite of professional services and support. The stock sports a Zacks Rank of 1 and has a VGM Score of A, at present. The Zacks Consensus Estimate of $2.95 for fiscal 2021 earnings moved 18% north over the past 30 days. Piper Sandler Companies ( PIPR Quick Quote PIPR - Free Report) is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings has been revised upward to $7.20 from $5.70 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 #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.
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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.
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