Net profit margin is the most important entry in an income statement as it demonstrates the affluence of a company. It determines the efficiency of a company in deploying its resources, making it the most suitable metric for the measurement of a company’s profitability.
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’s operations and cost-control measures.
Higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.
Moreover, a higher net profit margin as compared to peers lends a competitive edge. Strength in the metric not only attracts investors but also draws well-skilled employees that eventually add to the value of the business.
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 other 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 of the stock.
Zacks Rank less than or equal to 2: Stocks having 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 17 stocks that qualified the screen:
Johnson Outdoors Inc. JOUT is a leading global outdoor recreation company that designs, manufactures and markets a portfolio of winning, consumer-preferred brands across four categories: Watercraft, Marine Electronics, Diving and Outdoor Equipment. The stock sports a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2017 earnings remained steady at $3.50 over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chicago-based SP Plus Corporation SP provides professional parking, ground transportation, facility maintenance, security, and event logistics services to property owners and managers in the real estate industry. The stock carries a Zacks Rank #2 and a VGM Score of A. Further, the Zacks Consensus Estimate for 2017 earnings remained unchanged at $1.67 over the last 30 days.
American Woodmark Corp. AMWD manufactures and distributes kitchen cabinets and vanities for the remodeling and new home construction markets. The stock carries a Zacks Rank #2 and a VGM Score of B. Further, the Zacks Consensus Estimate for 2017 earnings remained unchanged at $4.96 over the last 30 days.
K12 Inc. LRN is a technology-based education company. The stock flaunts a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2017 earnings has remained steady at 50 cents over the last 30 days.
DAQO New Energy Corp. DQ is a manufacturer and seller of polysilicon and wafers. The stock carries a Zacks Rank #2 and a VGM Score of A. Further, the Zacks Consensus Estimate for 2017 earnings remained unchanged at $6.59 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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DAQO New Energy Corp. (DQ) : Free Stock Analysis Report
American Woodmark Corporation (AMWD) : Free Stock Analysis Report
Johnson Outdoors Inc. (JOUT) : Free Stock Analysis Report
K12 Inc (LRN) : Free Stock Analysis Report
SP Plus Corporation (SP) : Free Stock Analysis Report
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