Net profit margin is the most important entry in an income statement as it demonstrates the affluence of a company. It determines a company’s efficiency 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 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.
Screening Parameters 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 Evansville, IN,
Shoe Carnival, Inc. SCVL offers men, women and children a broad assortment of moderately priced dress, casual and athletic footwear with emphasis on national and regional brands. The Zacks Consensus Estimate for fiscal 2020 bottom line has moved 3.6% north to $2.88 in the past 30 days. The stock has a Zacks Rank of 1 and a VGM Score of A.
Enova International Inc. ENVA is a provider of online financial services. The stock is a #1 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings of $3.97 has been constant in the past 30 days.
Tilly's Inc. TLYS is a specialty retailer in the action sports industry, selling clothing, shoes and accessories. The stock is Zacks #1 Ranked and has a VGM Score of A. Further, the Zacks Consensus Estimate for fiscal 2020 earnings of 88 cents has been revised 6% upward in the past 30 days.
SP Plus Corporation ( SP Quick Quote SP - Free Report) is a provider of professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers across all markets of the real estate industry.The company is #1 Ranked and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2019 earnings has been stable at $2.79 in the past 30 days.
Momo Inc. MOMO provides mobile-based social networking platform, primarily in the Peoples Republic of China. The stock is a #1 Ranked player and has a VGM Score of B. The Zacks Consensus Estimate of $2.8 for fiscal 2019 earnings has been raised 1.8% 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 .