Investors flock to a business that reports profits on a regular basis. And to gauge the extent of profit there is no better metric than the net profit margin.
A proper analysis of the same reveals how efficiently a company is run. A higher net margin reflects the company’s efficiency at converting sales into actual profit.
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 in a company’s operations and cost-control measures.
Higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.
Moreover, a higher net profit margin as compared to peers lends a competitive edge. Strength in the metric not only attracts investors but also draws well-skilled employees that eventually add to the value of the business.
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.
Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison an uphill 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 of the stock.
Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.
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 offer the best upside potential.
Here are five of the 22 stocks that qualified the screen:
Headquartered in Fort Washington, PA, Nutrisystem Inc. (NTRI - Free Report) provides weight management products and services for women and men. The stock flaunts a Zacks Rank #1 and has a VGM Score of B. Notably, the Zacks Consensus Estimate for earnings remained steady at $1.90 for 2017 over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Johnson Outdoors Inc. (JOUT - Free Report) is a leading global outdoor recreation company that designs, manufactures and markets a portfolio of winning, consumer-preferred brands across four categories: Watercraft, Marine Electronics, Diving and Outdoor Equipment. The stock sports a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for earnings has surged 23.2% to $3.50 for fiscal 2017 over the last 30 days.
Munich, Germany-based Bayerische Motoren Werke AG (BAMXF - Free Report) is a multi-brand automobile manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. The stock carries a Zacks Rank #1 and has a VGM Score of A. Meanwhile, the Zacks Consensus Estimate for 2017 has increased by 9.5% to $13.59 over the last 30 days.
Nova Measuring Instruments Ltd. (NVMI - Free Report) is a developer and seller of process control systems. The stock sports a Zacks Rank #1 and a VGM Score of B. Notably, the Zacks Consensus Estimate for earnings remained steady at $1.78 for 2017 over the last 30 days.
France-based Arkema SA (ARKAY - Free Report) is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. The stock has a Zacks Rank #2 and has a VGM Score of A. Moreover, the Zacks Consensus Estimate for 2017 earnings remained unchanged at $8.51 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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