The primary motive of any investor is to earn maximum returns from his stakes. Thus, they are always on the lookout for companies, which are raking in huge moolah.
Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same reveals 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 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 gives 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 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
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 24 stocks that qualified the screen:
Headquartered in Plano, TX, Diodes Incorporated DIOD is a manufacturer and supplier of application-specific standard products, primarily in the communications, computing, industrial, consumer electronics and automotive markets.The stock has a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings of $2.35 has remained unaltered in the past 30 days.
Stamford, CT-based Information Services Group, Inc. III is a technology research and advisory company with global operations. The stock is a #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2018 earnings has been retained at 43 cents in the past 30 days.
Based in Houston, TX, Exterran Corporation EXTN offers compression, production and processing solutions that aid production and transportation of oil and gas. The stock is a Zacks #1 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2018 earnings has remained constant at 38 cents in the past 30 days.
Headquartered in Evansville, IN,Shoe Carnival, Inc. SCVL offers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with an emphasis on national and regional name brands. The Zacks Consensus Estimate for 2019 bottom line of $2.38 has remained fixed in the past 30 days. The stock has a Zacks Rank #1 and a VGM Score of A.
Black Mountain, NC-based Ingles Markets, Inc. IMKTA is a leading supermarket chain with operations in the Southeast United States. The Zacks Consensus Estimate for 2018 earnings has been revised 3.2% upward to $3.20 in the past 30 days. The stock has a Zacks Rank of 1 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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