Investors prefer to put their money in businesses that reap 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 reflects the company’s efficiency in converting sales into actual profits.
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 26 stocks that qualified the screen:
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 A. The Zacks Consensus Estimate for 2021 earnings has been revised upward to $10.05 from $8.15 in the past 30 days. PJT Partners Inc. ( PJT Quick Quote PJT - Free Report) is a financial advisory firm. The company offers strategic advisory, restructuring and reorganization, fund placement and funds advisory services to corporations, financial sponsors, institutional investors and governments. This Zacks Rank #1 stock currently has a VGM Score of A. The Zacks Consensus Estimate of $4.61 for the current-year earnings has moved up 32 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 presently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $4.35 for fiscal 2021 earnings moved 47.5% north in the past month. Century Communities, Inc. ( CCS Quick Quote CCS - Free Report) is a home building and construction company. Its activities comprise land acquisition, development, and entitlements; and the acquisition, development, construction, marketing, and sale of various single-family detached and attached residential home projects. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for the ongoing-year earnings has been revised upward to $6.02 from $8.32 over the past 30 days. Meridian Bioscience, Inc. ( VIVO Quick Quote VIVO - Free Report) is a fully integrated life-science company that manufactures, markets and distributes a broad range of innovative diagnostic test kits, purified reagents and biopharmaceutical enabling technologies that help deliver answers. This Zacks Rank #1 stock currently has a VGM Score of B. The Zacks Consensus Estimate of $1.82 for fiscal 2021 earnings has been revised 40 cents upward in seven days’ time. MainStreet Bancshares Inc. ( MNSB Quick Quote MNSB - Free Report) is a full-service bank. The bank provides deposits, makes loans and other services for the public. At present, the stock carries a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $1.85 for the current-year earnings has moved 22.5% north over 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/