Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends an insight into how well a company is run and 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:
Global Ship Lease, Inc. ( GSL Quick Quote GSL - Free Report) engages in owning and chartering out containerships under long-term, fixed rate charters to world class container liner companies. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for 2021 earnings has been revised upward to $3.20 from $2.62 in the past 30 days. Bassett Furniture Industries, Inc. ( BSET Quick Quote BSET - Free Report) is a leading manufacturer and marketer of high quality, mid-priced home furnishings. At present, the stock carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate of $2.70 for current-year earnings has moved 20.6% north over the past seven days. Alto Ingredients Inc. ( ALTO Quick Quote ALTO - Free Report) is a producer of specialty alcohols and essential ingredients. It currently carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate for the ongoing-year earnings has been revised upward to 44 cents from 5 cents in 60 days’ time. EMCORE Corporation ( EMKR Quick Quote EMKR - Free Report) offers a broad portfolio of compound semiconductor- based products for the broadband, fiber optic, satellite and terrestrial solar power markets. The stock currently holds a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2021 earnings has moved north 28.6% to 63 cents in the past 60 days. Interactive Brokers Group Inc. ( IBKR Quick Quote IBKR - Free Report) operates as an automated global electronic market maker and broker. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of B. The consensus mark for this year’s earnings has moved up to $3.13 from $3.04 in the past seven days. Euroseas Ltd. ( ESEA Quick Quote ESEA - Free Report) was formed under the laws of the Republic of the Marshall Islands to consolidate the ship owning interests of the Pittas family of Athens, Greece, which has been in the shipping business over the past 136 years. This Zacks Rank #2 stock currently has a VGM Score of A. The Zacks Consensus Estimate of $4.80 for this year’s earnings has been revised 49 cents upward in 30 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/