Investors flock to a business that reports profits on a regular basis. In order to gauge the extent of profit, there is no better metric than 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 of a company’s operations and cost-control measures.
Also, higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risk involved in an investment. Creditors also view it as crucial to determining a company’s ability to pay off debts.
Moreover, a higher net profit margin compared to its peers lends 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 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 a daunting task.
Further, 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 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 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 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 environment. 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 offer the best upside potential.
Here are five of the 23 stocks that qualified the screen:
Turtle Beach Corp. (HEAR - Free Report) is a premium San Diego, CA-based audio technology company that designs audio products for consumer, commercial and healthcare markets. The stock currently sports a Zacks Rank #1 and has a VGM Score of A. Moreover, the Zacks Consensus Estimate for 2018 earnings remained stable at 97 cents per share over the last 30 days.
PetroChina Company Limited (PTR - Free Report) is engaged in a broad range of petroleum-related activities, including the exploration, development and production of crude oil and natural gas. The Zacks Consensus Estimate for 2018 earnings grew 63.7% to $7.43 per share in the last 30 days. The stock has a Zacks Rank #1 and a VGM Score of A.
Lisle, IL-based SunCoke Energy, Inc. (SXC - Free Report) is a producer of metallurgical coke in the Americas. The stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings remained stable at 35 cents per share in the last 30 days.
OMV Aktiengesellschaft (OMV AG) (OMVJF - Free Report) is an Austria-based integrated oil and gas company operating through two segments: Upstream and Downstream. The stock sports a Zacks Rank #1 and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2018 earnings increased 17.8% to $2.27 over the last 30 days.
Manchester-based Luxfer Holdings PLC (LXFR - Free Report) designs, manufactures, and supplies high-performance materials, components, and high-pressure gas-containment devices for healthcare, environmental, protection, and specialty end-markets in Europe, North America, and internationally. The Zacks Consensus Estimate for 2018 earnings remained unchanged at $1.29 per share in the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of B.
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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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