Businesses churning out high profits are sought by one and all. In order to gauge the extent of profit, there is no better metric than net profit margin.
Net profit margin demonstrates the financial strength of a company. It determines the efficiency of a company in deploying its resources, making it the best metric to measure its profitability.
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 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.
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:
Headquartered in Irvine, CA, Tilly's, Inc. (TLYS - Free Report) is a specialty retailer in the action sports industry selling clothing, shoes and accessories. The stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings per share remained unchanged at 90 cents over the last 30 days.
Camp Hill, PA-based Harsco Corporation (HSC - Free Report) is a provider of industrial services and engineered products serving global industries that are fundamental to worldwide economic growth and infrastructure development. The Zacks Consensus Estimate for 2018 earnings remained unchanged at $1.23 per share in the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of A.
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 increased 3 cents to $1.45 per share in the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of A.
Altra Industrial Motion Corp. (AIMC - Free Report) , headquartered in Braintree, MA, is one of the leading manufacturers and distributors of a diversified range of mechanical power transmission, or MPT components. The Zacks Consensus Estimate for fiscal 2018 earnings of $2.58 grew 4 cents over the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of A.
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 has a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for 2018 earnings remained stable at $2.17 per share in 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.