Net profit, also referred to as the bottom line, is one of the key tools that determines the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red (net loss).
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 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.
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 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. VGM Score of A or B:
Here are six of the 21 stocks that qualified the screen:
Teekay Tankers Ltd. ( TNK Quick Quote TNK - Free Report) is a Marshall Islands corporation recently formed by Teekay Corporation to provide international marine transportation of crude oil. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $7.61 for 2020 earnings has been revised 23.9% upward over the past 60 days. Euronav NV ( EURN Quick Quote EURN - Free Report) owns, operates and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products. The company also offers ship-management services. At present, the stock carries a Zacks of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $2.79 for 2020 earnings moved up 3.3% in the past 30 days. RGC Resources Inc. ( RGCO Quick Quote RGCO - Free Report) has thousands of customers through its natural gas distribution companies that serve the Roanoke Valley and Bluefield, Virginia and West Virginia area. At present, this Zacks #2 Ranked player has a VGM Score of A. The Zacks Consensus Estimate of $1.24 for fiscal 2020 earnings has moved 9.7% north over the past 90 days. SB Financial Group, Inc. ( SBFG Quick Quote SBFG - Free Report) is a financial services holding company with two wholly-owned operating subsidiaries: State Bank and RDSI Banking Systems. Currently, the stock holds a Zacks Rank of #2 and has a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has been revised upward by 17.9% to $1.58 in 30 days’ time. DHT Holdings, Inc. ( DHT Quick Quote DHT - Free Report) operates a fleet of double-hull crude oil tankers on international routes. Currently, the stock carries a Zacks Rank of #2 and has a VGM Score of A. The Zacks Consensus Estimate for ongoing-year earnings moved 4.7% north to $2.21 in the last 30 days. Mueller Industries, Inc. ( MLI Quick Quote 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 carries a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate of $1.92 for this year’s earnings moved four cents north in 90 days’ time.
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. 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/