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 dent 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 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 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 28 stocks that qualified the screen:
Euronav NV EURN owns, operates and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products. The company also offers ship-management services. At present, the stock is a Zacks #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate of $1.88 for 2020 earnings has been revised 20.5% upward over the past month.
SYNNEX Corporation SNX 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 of $13.97 for fiscal 2020 earnings has been unrevised in the past 30 days.
CBIZ, Inc. CBZ provides professional business services that help clients better manage their finances and employees. This Zacks #1 Ranked player has a VGM Score of B. The Zacks Consensus Estimate of $1.40 for the current-year earnings moved 6.1% north in 30 days’ time.
The Bancorp, Inc. TBBK is a Delaware-chartered, federally insured commercial bank, which focuses on service to small- and mid-size businesses. The Zacks Consensus Estimate of $1.30 for the ongoing year’s bottom line moved up 7.4% over the past 30 days. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B.
Metropolitan Bank Holding Corporation MCB is a chartered commercial bank. Currently, the stock flaunts a Zacks Rank of #1 and has a VGM Score of B. The Zacks Consensus Estimate of $4.40 for 2020 earnings remained unchanged over the past month.
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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.
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SYNNEX Corporation (SNX) : Free Stock Analysis Report
CBIZ, Inc. (CBZ) : Free Stock Analysis Report
The Bancorp, Inc. (TBBK) : Free Stock Analysis Report
Euronav NV (EURN) : Free Stock Analysis Report
Metropolitan Bank Holding Corp. (MCB) : Free Stock Analysis Report
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