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 40 stocks that qualified the screen:
Sterling Construction Company ( STRL Quick Quote STRL - Free Report) is a leading heavy civil construction company that specializes in the building and reconstruction of transportation and water infrastructure projects in the United States. 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 $1.98 from $1.87 in 60 days’ time. Euroseas ( 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 for the last 136 years. It operates in the dry cargo, drybulk and container shipping markets. At present, the stock flaunts a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $6.25 for its current-year earnings has moved 52.4% north over the past seven days. Fidelity National Title Group ( FNF Quick Quote FNF - Free Report) is a leading provider of title insurance, specialty insurance and claims management services. Currently, the stock sports a Zacks Rank of 1 and has a VGM Score of B. The consensus mark for this year’s earnings has moved 48 cents upward to $6.62 in the past 30 days. KT Corporation ( KT Quick Quote KT - Free Report) provides telecommunication services. Its services include mobile telecommunications services, telephone services, fixed-line and VoIP telephone services. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $1.55 for 2021 earnings has been revised 9.9% upward over the past 60 days. Portman Ridge Finance Corporation ( PTMN Quick Quote PTMN - Free Report) is an investment company. It focuses on investments in consumer products, food and beverages, heathcare, logistics and distribution, media, telecommunication, education, aerospace and defense, industrial and environmental industries. Currently, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The consensus mark for the ongoing-year earnings has moved 80 cents upward to $3.90 in the past week. Unifi ( UFI Quick Quote UFI - Free Report) is a global textile solutions provider and one of the world's leading innovators in manufacturing synthetic and recycled performance fibers. The company's proprietary technologies offer increased performance, comfort and style advantages, enabling customers to develop products that perform, look and feel better. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $1.36 for fiscal 2022 earnings has moved 21 cents north in the past 60 days.
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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/