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Investors prefer to put their money in businesses that reap profits on a regular basis. In order to gauge the extent of profits, there is no better metric than the net profit margin.
A higher net margin reflects the company’s efficiency in 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 of a company’s operations and its 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 who eventually enhance a business’ value.
Moreover, a higher net profit margin compared with its peers provides 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.
In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.
Furthermore, 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.
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 42 stocks that qualified the screen:
Lifetime Brands LCUT is a leading designer, marketer and distributor of kitchenware, cutlery & cutting boards, bakeware & cookware, pantryware & spices, tabletop and bath accessories. . The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for the current year earnings has been revised upward to $1.39 from $1.31 in 30 days’ time.
TimkenSteel Corporation TMST engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company provides air-melted alloy steel bars, tubes, and precision components, as well as value-added services, including thermal treatment and machining. At present, the stock flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $2.72 for 2021 earnings has moved 79 cents north over the past 30 days.
M/I Homes MHO is one of the leading builders of single family homes in the United States. M/I Homes has established an exemplary reputation based on a strong commitment to superior customer service, innovative design, quality construction and premium locations. This Zacks Rank #1 stock currently flaunts a VGM Score of A. The Zacks Consensus Estimate of $13.83 for the ongoing-year earnings has moved up 32.5% in the past 30 days.
Piper Sandler Companies PIPR is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for 2021 earnings has moved up to $17.09 from $12.90 in the past 30 days.
Mueller Industries MLI is a leading manufacturer of copper tube and fittings; brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $6.25 for current-year earnings has moved 52.4% north over the past 60 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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Mueller Industries, Inc. (MLI) : Free Stock Analysis Report
MI Homes, Inc. (MHO) : Free Stock Analysis Report
Timken Steel Corporation (TMST) : Free Stock Analysis Report
Lifetime Brands, Inc. (LCUT) : Free Stock Analysis Report
Piper Sandler Companies (PIPR) : Free Stock Analysis Report
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