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.
Jabil Inc. ( JBL Quick Quote JBL - Free Report) , Hudson Technologies ( HDSN Quick Quote HDSN - Free Report) , H&E Equipment Services ( HEES Quick Quote HEES - Free Report) and Vista Oil & Gas ( VIST Quick Quote VIST - 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, 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 — Jabil, Hudson Technologies, H&E Equipment Services and Vista Oil & Gas — from the 50 stocks that qualified the screen:
Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, production, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries. Jabil sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Jabil’s fiscal 2023 earnings has been revised upward to $8.18 per share from $7.86 in the past 60 days. JBL surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 9.3%.
Hudson Technologies is a leading provider of innovative solutions to recurring problems within the refrigeration industry. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $2.16 for Hudson Technologies’ current-year earnings has moved 37 cents north in the past 30 days. HDSN surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 297.3%.
H&E Equipment Services is one of the largest integrated equipment services companies in the United States, with full-service facilities throughout the Intermountain, Southwest, Gulf Coast & Southeast regions of the United States. H&E currently sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of $3.26 for H&E’s 2022 earnings has moved 17.3% north in the past 30 days. HEES surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 41.7%.
Vista Oil & Gas is engaged in the energy sector. It focuses on the identification, acquisition and development of oil and gas fields, primarily in Mexico, Argentina, Brazil and Colombia. The company currently carries a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Vista Oil’s 2022 earnings has been revised upward to $3.11 per share from $2.40 in the past 60 days. VIST surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 63.8%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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/