The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding shareholders. Net profit margin is an effective tool to measure the profits reaped by a business.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric gives insight into how well a company is run and the headwinds weighing on it.
Encore Wire Corporation ( WIRE Quick Quote WIRE - Free Report) , Tecnoglass Inc. ( TGLS Quick Quote TGLS - Free Report) , Universal Logistics Holdings, Inc. ( ULH Quick Quote ULH - Free Report) and Cumulus Media Inc. ( CMLS Quick Quote CMLS - Free Report) boast solid net profit margins. 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, the 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 a company with 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 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 environments. 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 we have picked four stocks — Encore Wire, Tecnoglass, Universal Logistics and Cumulus Media — from the 57 stocks that qualified the screen:
Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire sports a Zacks Rank of 1, at present, and has a VGM Score of A.
The Zacks Consensus Estimate for Encore Wire’s 2022 earnings has been revised upward to $19.18 per share from $10.74 in the past 60 days. WIRE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 323.9%.
Tecnoglass is engaged in the manufacturing and sale of architectural glass and windows and aluminum products for the residential and commercial construction industries. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $2.24 for Tecnoglass’ current-year earnings has moved 12 cents north in the past 60 days. TGLS surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 28.3%.
Universal Logistics is a provider of customized transportation and logistics solutions. It offers services across its entire supply chain, including truckload, brokerage, intermodal, dedicated and value-added services. Universal Logistics currently sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $4.55 for Universal Logistics’ 2022 earnings has moved 40% north in the past 60 days. ULH surpassed the Zacks Consensus Estimate thrice in the trailing four quarters, the average surprise being 61.3%.
Cumulus Media is a radio broadcasting company. It owns and operates radio stations, which provide local programs, music, sports, entertainment, news and advertising solutions. The company currently carries a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Cumulus Media’s 2022 earnings has been revised upward to $2.05 per share from $1.87 in the past 60 days. CMLS surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 108.1%.
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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/