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 VGM Score of A or B: 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.
Here are six of the 26 stocks that qualified the screen:
Titan Machinery Inc. ( TITN Quick Quote TITN - Free Report) represents a diversified mix of agricultural, construction, and consumer products dealerships located in the upper Midwest. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward to $1.67 from $1.44 in 30 days’ time. Masonite International Corporation ( DOOR Quick Quote DOOR - Free Report) is a designer and manufacturer of interior and exterior doors. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $8.48 for the current-year earnings has moved 14 cents north over the past 30 days. Sharps Compliance Corporation ( SMED Quick Quote SMED - Free Report) is a leading provider of cost-effective disposal solutions for small quantity generators of medical waste. This Zacks Rank #2 stock currently flaunts a VGM Score of A. The Zacks Consensus Estimate of $5.57 for fiscal 2021 earnings has moved up 55.8% in the past 60 days. 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. This Zacks #2 Ranked stock has a VGM Score of A, at present. The Zacks Consensus Estimate of $2.24 for 2021 earnings has moved 39 cents north in 30 days’ time. Fidelity National Financial, Inc. ( FNF Quick Quote FNF - Free Report) is a leading provider of title insurance, specialty insurance and claims management services. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $14.27 for fiscal 2022 earnings has moved up 31 cents over the past 30 days. 1-800-FLOWERS.COM, Inc. ( FLWS Quick Quote FLWS - Free Report) is a leading e-commerce provider of floral products and gifts, in terms of number of customers and revenues. This Zacks Rank #2 stock currently has a VGM Score of B. The Zacks Consensus Estimate of $1.87 for fiscal 2021 earnings has been revised 5 cents upward in 60 days’ time.
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. 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/