Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than the net profit margin.
A higher net margin underlines a company’s efficiency to translate sales into actual profits. Moreover, this metric lends an insight into how well a company is run and the headwinds weighing on 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 five of the 27 stocks that qualified the screen:
Great Lakes Dredge & Dock Corp. 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 2020 earnings of 86 cents has been constant in the past 30 days.
OneMain Holdings, Inc. (OMF - Free Report) provides consumer finance and insurance products and services.The stock is a #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for 2020 earnings of $6.73 has been raised 1.5% over the past 30 days.
North American Construction Group Ltd. (NOA - Free Report) is involved primarily in providing services for mining and heavy construction. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for 2020 earnings has been steady at $1.59 in the past 30 days.
Everi Holdings Inc. (EVRI - Free Report) supplies imaginative entertainment and trusted technology solutions for the casino, interactive and gaming industry. The Zacks Consensus Estimate for 2020 bottom line of 58 cents has been intact in the past 30 days. The stock has a Zacks Rank of 2 and a VGM Score of A.
Sony Corp. (SNE - Free Report) designs, manufactures and sells several consumer and industrial electronic equipment. It offers audio and video equipment, televisions, displays, semiconductors, electronic components, gaming consoles, computers and computer peripherals and telecommunication equipment. The stock is a #2 Ranked player and has a VGM Score of B. The Zacks Consensus Estimate of $4.18 for fiscal 2020 earnings has risen 8.4% over 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.