Net profit, also referred to as the bottom line, is one of the key tools determining 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 into the red.
Kronos Worldwide, Inc. ( KRO Quick Quote KRO - Free Report) , REX American Resources Corporation ( REX Quick Quote REX - Free Report) , Photronics, Inc. ( PLAB Quick Quote PLAB - Free Report) and Franklin Covey Co. ( FC Quick Quote FC - 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 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 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 discuss our four picks from the 47 stocks that qualified the screen:
Kronos Worldwide is a leading producer and marketer of TiO2, a white pigment for providing whiteness, brightness and opacity that is used in a broad range of products. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Kronos Worlwide’s 2022 earnings has been revised upward by 60.9% to $2.06 per share in the past 60 days. KRO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 24%.
REX American Resources, formerly known as REX Stores Corporation, is engaged in the production and sale of ethanol and distillers grains. The company owns interests in corn- or sorghum-based ethanol production facilities in Illinois, Iowa and Texas. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for REX American Resources’ fiscal 2023 earnings has been revised upward to $7.13 per share from $5.62 in the 60 days. KRO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 40.6%.
Photronics is a leading worldwide manufacturer of photomasks. Photomasks are high-precision quartz plates that contain microscopic images of electronic circuits. At present, the stock has a Zacks Rank #1 and a VGM Score of B.
The Zacks Consensus Estimate of $1.90 per share for Photronics’ current-fiscal earnings has moved 41 cents north in the past 60 days. PLAB surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matched the same on one occasion, the average surprise being 23.7%.
Franklin Covey is an international learning and performance solutions company dedicated to increasing the effectiveness of individuals and organizations. Franklin Covey sports a Zacks Rank of 1, at present, and has a VGM Score of B.
The Zacks Consensus Estimate for FC’s fiscal 2022 earnings has been revised upward by 34 cents to $1.21 per share in the past 30 days. Franklin Covey surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 237%.
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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/