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 five of the 16 stocks that qualified the screen:
Teekay Tankers Ltd. (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 $9.42 for 2020 earnings has been revised 23.8% upward over the past 30 days.
Career Education Corporation (PRDO - Free Report) provides educational services. The company offers bachelor's, associate and non-degree programs in information technologies, visual communication and design technologies, business studies and culinary arts. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.51 for current-year earnings moved 4.1% upward over the past 30 days.
Euronav NV (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 $3.43 for the ongoing-year earnings moved up 13.6% in the past 30 days.
Eagle Bancorp Montana, Inc. (EBMT - Free Report) provides retail banking services in the south central portion of Montana. This Zacks #2 Ranked player has a VGM Score of A currently. The Zacks Consensus Estimate of $2.16 for this year’s earnings has moved 7.5% north over the past 30 days.
Vistra Energy Corporation (VST - Free Report) is an energy company. It offers electricity and power generation, distribution and transmission solutions. 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 6.9% to $2.48 in 30 days’ time.
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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/.