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 24 stocks that qualified the screen:
Select Medical Holdings Corporation ( SEM Quick Quote SEM - Free Report) is a healthcare company, which owns long-term acute care and inpatient rehabilitation hospitals as well as occupational health and physical therapy clinics. The stock currently sports a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for its 2021 earnings has been revised upward to $2.23 from $1.51 in the past 30 days. Veritiv Corporation ( VRTV Quick Quote VRTV - Free Report) engages in offering North American business-to-business distribution solutions. It provides packaging, print and print management, publishing, supply chain, facility and logistics solutions that span the entire lifecycle of core business operations. At present, the stock flaunts a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $2.70 for its current-year earnings has moved 80% north over the past 30 days. 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 carries a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for its ongoing-year earnings has been revised upward to $8.32 from $6.02 over the past 60 days. Matson, Inc. ( MATX Quick Quote MATX - Free Report) operates as an ocean transportation and logistics company. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for its 2021 earnings has been revised upward to $5.49 from $4.49 in 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 flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for its 2021 earnings has moved up to $10.05 from $8.15 in the past 60 days. Nexstar Media Group, Inc. ( NXST Quick Quote NXST - Free Report) currently owns, operates, programs or provides sales and other services to television stations in the states of Illinois, Indiana, Maryland, Missouri, Montana, Texas, Pennsylvania, Louisiana, Arkansas, Alabama and New York. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $14.33 for this year’s earnings has been revised 8.6% upward in the past 30 days.
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Disclosure: Performance information for Zacks' portfolios and strategies are available at: . https://www.zacks.com/performance/