Investors flock to a business that reports profits on a regular basis. And to gauge the extent of profit there is no better metric than net profit margin.
A higher net margin reflects a company’s efficiency at converting sales into actual profit.
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 compared to its peers lends 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.
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 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 20 stocks that qualified the screen:
Columbia, MD-based GP Strategies Corp (NYSE:GPX) is a global provider of training, eLearning solutions, management consulting, and engineering services. The stock has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for 2018 earnings has remained steady at $1.43 per share in the last 30 days.
France-based Arkema S.A. (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 2018 earnings has increased by 3.6% to $10.36 in the last 30 days.
New Albany, OH-based Commercial Vehicle Group, Inc. (NASDAQ:CVGI) supplies interior systems, vision-safety solutions and other cab-related products to the global commercial vehicle market. The stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings has increased by a nickel to $1.22 over the last 30 days.
MasTec, Inc. (NYSE:MTZ) is one of the largest providers of construction services to the telecommunications industry in the United States. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings has increased by 4.2% to $3.25 over the last 30 days.
Headquartered in Racine, WI, Modine Manufacturing Co. (NYSE:MOD) is a designer, manufacturer and distributor of thermal management systems and components for several end markets. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings has increased 7 cents to $1.50, over the last 30 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.
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