Investors eye businesses that report profits on a regular basis. In order to gauge the extent of profit, there is no better metric than net profit margin.
A higher net margin reflects a company’s efficiency in converting sales into actual profit. Moreover, this metric lends an insight into how well a company is run and the headwinds confronting 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 cost-control measures.
Also, higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risk involved in an investment. Creditors also view it as crucial to determining a company’s ability to pay off debts.
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.
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.
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 19 stocks that qualified the screen:
Frisco, TX-based Integer Holdings Corp (NYSE:ITGR) manufactures and develops medical devices and components primarily for original equipment manufacturers (OEMs), which depend on it to design, develop and produce intellectual property protected medical device technologies. The stock currently sports a Zacks Rank #1 and has a VGM Score of A.
Moreover, the Zacks Consensus Estimate for 2018 grew 2.97% in the last 30 days.
Lisle, IL-based SunCoke Energy (NYSE:SXC) is a producer of metallurgical coke in the Americas. The stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings remained stable at 35 cents per share in the last 30 days.
Shiseido Co (OTCMKTS:SSDOY) is a Japan-based company engaged in the manufacturing and sale of cosmetics, toiletries, beauty products, health foods, beauty foods and pharmaceuticals. The Zacks Consensus Estimate for 2018 earnings remained unchanged at $1.68 per share in the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of B.
Headquartered in New York, Weight Watchers (NYSE:WTW) is the largest provider of weight control programs in the world. The stock sports a Zacks Rank #1 and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2018 earnings increased 3.6% to $2.91 over the last 30 days.
Hamilton, Bermuda- based Triton International (NYSE:TRTN) offers acquisition, leasing, re-leasing, and sale of intermodal containers. The Zacks Consensus Estimate for 2018 earnings increased 2.6% to $4.32 per share in the last 30 days. The stock has a Zacks Rank #2 and a VGM Score of A.
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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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