Businesses earning big bucks are pursued by all and sundry. In order to estimate the profit limit, there is no better measure than the net profit margin.
Net profit margin signifies the financial standing of a company. It is indicative of the company’s ability to manage its resources, thereby making it the paramount metric to assess 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 in a company operations and 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 that eventually add to the value of the business.
Moreover, a higher net profit margin compared to its peers gives 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 Scoreof 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 six of the 30 stocks that qualified the screen:
Chicago-based Enova International Inc. (ENVA - Free Report) is a provider of online financial services. The stock has a Zacks Rank #1 and a VGM Score of A. Further, the Zacks Consensus Estimate for current-year earnings has been revised 6% upward to $3.30 in the past 30 days.
Headquartered in Hato Rey, Puerto Rico, Popular, Inc. (BPOP - Free Report) is a publicly owned bank holding company, which provides its products and services, primarily to institutional and retail customers. The Zacks Consensus Estimate for 2019 earnings has moved 7% north to $6.59 over the last 30 days. The stock has a Zacks Rank of 1 and a VGM Score of A.
Based in Oak Brook, IL, Great Lakes Dredge & Dock Corp. (GLDD - Free Report) provides dredging services in the United States and internationally. The stock is a Zacks #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings of 69 cents has been raised 48% in the past 30 days.
St. George, UT-based SkyWest, Inc. (SKYW - Free Report) operates a regional airline in the United States. The stock is a #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate of $6.09 for 2019 earnings has been lifted 4% over the past 30 days.
Bermuda-based Argo Group International Holdings, Ltd. (ARGO - Free Report) underwrites specialty insurance and reinsurance products in the property and casualty markets. The stock is a #1 Ranked player and has a VGM Score of B. The Zacks Consensus Estimate of $4.27 for 2019 earnings has been upped 6% over the past 30 days.
Headquartered in Fremont, CA, SYNNEX Corporation (SNX - Free Report) is a global information technology supply chain services company, offering a comprehensive range of services to original equipment manufacturers, software publishers and reseller customers worldwide. The stock has a Zacks Rank of 2 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2019 earnings per share has been increased from $11.89 to $11.91 over the past 30 days.
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.