Net profit margin is the most effective way to measure a company’s profits. A proper analysis of the same reveals how well a company is run and the headwinds confronting it.
A higher net margin reflects the company’s efficiency at 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 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 as compared to peers lends a company 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 the net profit. In such cases, the measure is rendered ineffective to analyze 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 peers in all types of market environment.
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 25 stocks that qualified the screen:
France-based Arkema SA (OTCMKTS:ARKAY) is engaged in the manufacturing and marketing of vinyl, industrial chemicals, and performance products. The stock has a Zacks Rank #2 and a VGM Score of A. Moreover, the Zacks Consensus Estimate for 2017 earnings has increased by 7 cents to $8.60 over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Fort Washington, PA, Nutrisystem Inc. (NASDAQ:NTRI) provides weight management products and services for women and men. The stock carries a Zacks Rank #2 and a VGM Score of B. Notably, the Zacks Consensus Estimate for 2017 earnings has climbed by a couple of cents to $1.95 over the last 30 days.
Gibraltar Industries Inc (NASDAQ:ROCK) manufactures and distributes products to the industrial and buildings market. The company has its headquarters at Buffalo, NY. The stock has a Zacks Rank #2 and a VGM Score of A. Meanwhile, the Zacks Consensus Estimate for 2017 earnings has remained steady at $1.65 per share over the last 30 days.
Singapore-based Broadcom Ltd (NASDAQ:AVGO) designs, develops and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings has increased by 81 cents to $17.88 per share over the last 30 days.
Willdan Group, Inc. (NASDAQ:WLDN) is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of the government. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2017 earnings has remained steady at $1.16 over the last 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.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »