Net profit, also referred to as the bottom line, is one of the key tools that determines the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red (net loss).
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 businessvalue.
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 13 stocks that qualified the screen:
Great Lakes Dredge & Dock Corporation GLDD is the largest provider of dredging services in the United States conducting business to maintain and deepen shipping channels, reclaim land from the ocean, and renourish storm-damaged coastlines. At present, this Zacks #1 Ranked player has a VGM Score of A. The Zacks Consensus Estimate of $1.06 for current-year earnings moved up 20 cents over the past 90 days.
Perdoceo Education Corporation PRDO provides educational services. The company offers bachelor's, associate, and non-degree programs in information technologies, visual communication and design technologies, business studies and culinary arts. At present, the stock sports a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $1.51 for 2020 earnings has been revised 4.1% upward over the past 60 days.
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 A. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward to $2.33 from 78 cents in 30 days’ time.
Carriage Services, Inc. CSV is a leading provider of death-care services and products in the United States. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate of $1.40 for the ongoing year’s earnings has been revised upward by 15 cents in the past 60 days.
Helen of Troy Limited HELE is a leading consumer products player that operates through a diversified portfolio of renowned brands. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate of $8.52 for fiscal 2021 earnings has been revised upward by couple of cents over the past seven days.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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/.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Helen of Troy Limited (HELE) : Free Stock Analysis Report
Great Lakes Dredge Dock Corporation (GLDD) : Free Stock Analysis Report
Carriage Services, Inc. (CSV) : Free Stock Analysis Report
Lakeland Industries, Inc. (LAKE) : Free Stock Analysis Report
Career Education Corporation (PRDO) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research