The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding a company’s shareholders.
Net profit margin is an effective tool for measuring the profits reaped by a business. A higher net margin underlines a company’s efficiency to translate sales into actual profits. Moreover, this metric lends an insight into how well a company is run and what are the headwinds weighing on it.
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 six of the 16 stocks that qualified the screen:
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 of $2.33 for fiscal 2021 earnings has been revised upward to $2.33 from 78 cents in the past week.
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 coastline. 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 60 days.
Vistra Energy Corporation VST is an energy company. It offers electricity and power generation, distribution and transmission solutions. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $2.63 for ongoing-year earnings moved 8 cents north in seven days’ time.
Helen of Troy Limited HELE is a leading consumer products player that operates through a diversified portfolio of renowned brands. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $8.50 for fiscal 2021 earnings has been revised upward by 86 cents in the past seven days.
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 2020 earnings has been revised upward by 15 cents in the past 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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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
Vistra Energy Corp. (VST) : Free Stock Analysis Report
Career Education Corporation (PRDO) : Free Stock Analysis Report
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