Net profit margin is what an entrepreneur ultimately strives toward. A higher profit margin implies that a company is more efficient at converting sales into actual profit. In fact, it can turn out to be an accurate point of reference to gauge the potential of a company’s operations and cost-control measures.
Net Profit Margin = Net profit /Sales * 100.
In simple terms, net income is the residual of all revenues and gains over all expenses and losses during a particular period. It can also be defined as the net increase in shareholder’s equity, which the company can retain as earnings or distribute among shareholders as dividend.
Moreover, the strength in the metric not only attracts new investors but also draws well-skilled employees who eventually add to the value of the business.
Moreover, a higher net profit margin as compared to peers lends 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 vital for technology companies.
Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a complex task.
Further, for companies preferring to grow with debt, instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective to analyze 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 other criteria to ensure maximum returns from this strategy.
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 prospects of the stock.
Zacks Rank equal to 1: In good markets or bad, stocks with a Zacks Rank #1 (Strong Buy) continue to outperform. You can see the complete list of today’s Zacks #1 Rank stocks here.
VGM Score of ‘A’ or ‘B’: Our research shows that stocks with a VGM Score of 'A' or 'B' when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Here are five of the seven stocks that qualified the screen:
East Rutherford, NJ-based Cambrex Corporation (CBM - Free Report) provides products and services that accelerate and improve the development and commercialization of new and generic therapeutics. The stock has a VGM score of ‘A’. Moreover, the Zacks Consensus Estimate for 2016 earnings has increased by 9 cents (3.7%) to $2.55 per share over the last 30 days.
Gibraltar Industries Inc. (ROCK - Free Report) manufactures and distributes products to the industrial and buildings market. The company has its headquarters at Buffalo, NY. The stock has a VGM score of ‘B’. Meanwhile, the Zacks Consensus Estimate for 2016 earnings has climbed 14 cents (9.7%) to $1.58 per share over the last 30 days.
Southlake, TX-based Sabre Corporation (SABR - Free Report) provides technology solutions to the global travel and tourism industry. Its software, data, mobile and distribution solutions are used by airlines’ hotel properties to manage critical operations, such as passenger and guest reservations, revenue management, and flight, network and crew management. The company has a VGM Score of ‘B’. Its earnings estimate for the current year has increased by 20 cents (19.4%) to $1.23 per share over the last 30 days.
Bedford, TX-based State National Companies Inc. is a leading specialty provider of property and casualty insurance in the U.S. The stock has a VGM score of ‘B’. Moreover, the Zacks Consensus Estimate for 2016 earnings has increased by a dime (10.5%) to $1.05 per share over the last 30 days.
El Segundo, CA-based Stamps.com Inc (STMP - Free Report) provides Internet-based services for mailing or shipping letters, packages or parcels anywhere in the U.S. The stock has a VGM score of ‘B’. Meanwhile, the Zacks Consensus Estimate for 2016 earnings has risen by $1.08 (19.8%) to $6.53 per share over the last 30 days.
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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.
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