Investors prefer to put their money into businesses that reap profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin reflects the company’s efficiency in converting sales into actual profits.
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 its 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 who eventually enhance a business’ value.
Moreover, a higher net profit margin compared with its peers provides 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.
In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.
Furthermore, 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 17 stocks that qualified the screen:
Enova International, Inc. (ENVA - Free Report) is a provider of online financial services. It offers loans to customers in the United States and in the United Kingdom, Australia and Canada. At present, the stock is a Zacks #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate of $4.64 for 2020 earnings has been revised 7.9% upward over the past 60 days.
Mueller Industries, Inc. (MLI - Free Report) is a leading manufacturer of copper tube and fittings; brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.92 for 2020 earnings has been revised 2.1% upward in the past 60 days.
The Bancorp, Inc. (TBBK - Free Report) is a Delaware-chartered, federally insured commercial bank, which focuses on service to small- and mid-size businesses. The Zacks Consensus Estimate of $1.30 for the ongoing year’s bottom line moved up 8.3% over the past 30 days. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B.
SP Plus Corporation (SP - Free Report) provides professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry. This Zacks #2 Ranked player has a VGM Score of A. The Zacks Consensus Estimate of $3.09 for the current-year earnings moved 2.7% north in 30 days’ time.
CB Financial Services, Inc. (CBFV - Free Report) is the bank holding company for Community Bank, a chartered commercial bank. Currently, the stock carries a Zacks Rank of #2 and has a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings has been revised to $2.17 from $2.15 in the past 60 days.
Progress Software Corporation (PRGS - Free Report) offers a platform for developing and deploying mission-critical business applications. Progress Software empowers enterprises and ISVs to build and deliver cognitive-first applications that harness big data to derive business insights and competitive advantage. The stock carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings has been revised to $2.90 from $2.87 in the past 60 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/.