Net profit, also referred to as the bottom line, is one of the key tools that determines the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red (net loss).
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 businessvalue.
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:
Citi Trends, Inc. ( CTRN Quick Quote CTRN - Free Report) is a value-priced retailer of urban fashion apparel and accessories for the entire family. 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 $6.50 from $5.00 in the past 60 days. 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 flaunts a Zacks Rank of 1, at present, and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward to $2.13 from $1.95 in 30 days’ time. Jabil, Inc. ( JBL Quick Quote JBL - Free Report) is one of the largest global suppliers of electronic manufacturing services (EMS). At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $6.33 for fiscal 2022 earnings moved 8 cents north over the past seven days. Entravision Communications Corporation ( EVC Quick Quote EVC - Free Report) is a diversified media company utilizing a combination of television, radio, outdoor and publishing operations to reach Hispanic consumers in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate for this year’s earnings has been revised upward to 41 cents from 37 cents in the last 60 days. Applied Industrial Technologies, Inc. ( AIT Quick Quote AIT - Free Report) is a distributor of value-added industrial products — including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $5.31 for fiscal 2022 earnings has moved up 6.2% over the past 60 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 carries a Zacks Rank of 2 and has a VGM Score of A. The consensus mark for the ongoing-year earnings has moved 5 cents upward to $6.67 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/