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 17 stocks that qualified the screen:
SYNNEX Corporation SNX is a leading business process services company. The company provides a comprehensive range of distribution, logistics and integration services for the technology industry and outsourced services focused on customer engagement to a broad range of enterprises. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised upward to $12.25 from $10.75 in seven days’ time.
L.B. Foster Company FSTR is engaged in the manufacture, fabrication and distribution of rail and trackwork, piling, highway products and tubular products. The stock sports a Zacks Rank of 1 and has a VGM Score of A, at present. The Zacks Consensus Estimate of 70 cents for the current-year earnings moved up by couple of cents over the past seven days.
360 Finance Inc. QFIN offers digital consumer finance platform. The company provides online consumer finance products to prime, underserved borrowers funded primarily by its funding partners. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for the ongoing year’s earnings has been revised upward to $2.79 from $2.32 in 60 days’ time.
Lakeland Industries, Inc. LAKE is one of the world’s leading manufacturers and sellers of protective clothing and accessories for industrial and public use. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward to $3.29 from $2.33 in 30 days’ time.
Aviat Networks, Inc. AVNW, previously known as Harris Stratex Networks, Inc., is a global supplier of wireless network solutions and network management software, backed by a suite of professional services and support. The stock sports a Zacks Rank of 1 and has a VGM Score of B, at present. The Zacks Consensus Estimate of $2.50 for fiscal 2021 earnings moved 56.3% 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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L.B. Foster Company (FSTR) : Free Stock Analysis Report
Aviat Networks, Inc. (AVNW) : Free Stock Analysis Report
SYNNEX Corporation (SNX) : Free Stock Analysis Report
Lakeland Industries, Inc. (LAKE) : Free Stock Analysis Report
360 Finance, Inc. Sponsored ADR (QFIN) : Free Stock Analysis Report
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