Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profit, there is no better metric than the net profit margin.
A higher net margin reflects a company’s efficiency in converting sales into actual profit. Moreover, this metric lends an insight into how well a company is run and the headwinds confronting it.
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 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 six of the 33 stocks that qualified the screen:
Black Mountain, NC-based Ingles Markets, Inc. (IMKTA - Free Report) is a leading supermarket chain with operations in the Southeast United States. The Zacks Consensus Estimate of $3.9 for fiscal 2019 earnings has been steady over the past 30 days. The stock has a Zacks Rank #1 and a VGM Score of A.
North American Construction Group Ltd. (NOA - Free Report) is involved primarily in providing services related to mining and heavy construction. The stock is Zacks #1 Ranked and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings has been reiterated at $1.26 in the past 30 days.
Headquartered 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 2019 earnings of 74 cents has moved a couple of cents north in the past 30 days.
Bellevue, WA-domiciled Radiant Logistics, Inc. operates as a third-party logistics and multi-modal transportation services company. The stock has a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings of 52 cents has been raised 4% in the past 30 days.
Based in Austin, TX, Hanger Inc. (HNGR - Free Report) delivers orthotic and prosthetic patient care, and distributes O&P products plus rehabilitative solutions. The stock is a #1 Ranked player and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2019 earnings of 87 cents has been constant in the past 30 days.
Domiciled in St. George, UT, SkyWest, Inc. (SKYW - Free Report) operates a regional airline in the United States. The stock has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of $6.18 has been reaffirmed in the past 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.