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 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. 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 14 stocks that qualified the screen: Perdoceo Education Corporation ( PRDO Quick Quote 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. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.51 for 2020 earnings has been revised 4.1% upward over the past 30 days. Systemax Inc. ( SYX Quick Quote SYX - Free Report) is a direct marketer of brand name and private label products, including personal desktop computers, notebook computers, computer related products, and industrial products, in North America and Europe. Currently, the stock flaunts a Zacks Rank of #1 and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised upward by 15.8% to $1.10 in 60 days’ time. Orion Group Holdings, Inc. ( ORN Quick Quote ORN - Free Report) is a construction company, which provides services on and off the water primarily in the continental United States, Alaska, Canada and the Caribbean Basin. This Zacks #2 Ranked player has a VGM Score of A, currently. The Zacks Consensus Estimate of 25 cents for this year’s earnings has moved 25% north over the past 60 days. Eagle Bancorp Montana, Inc. ( EBMT Quick Quote EBMT - Free Report) operates as a holding company for American Federal Savings Bank that provides retail banking services in the south central portion of Montana. The stock currently carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $2.16 for ongoing-year earnings moved 7.5% upward over the past 60 days. 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 carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate of $10.32 for 2020 earnings has been revised 35.6% upward over the past 30 days. Mackinac Financial Corporation ( MFNC Quick Quote MFNC - Free Report) provides commercial and retail banking products and services in the United States. This Zacks #2 Ranked stock has a VGM Score of B currently. The Zacks Consensus Estimate of $1.50 for this year’s earnings has moved 47.1% north 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/