Net profit margin is the most important entry in an income statement, as it demonstrates the affluence of a company. It determines the efficiency of a company in deploying its resources, making it the best metric to measure a company's profitability.
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.
Higher net profit is indispensable for rewarding stakeholders. Also, strength in the metric not only attracts new investors but also draws well-skilled employees that eventually add to the value of the business.
Moreover, a higher net profit margin as compared to peers lends 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.
Moreover, the difference in accounting treatment of various items - especially non-cash expenses like depreciation and stock-based compensation - makes comparison a daunting task.
Further, 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 to analyze 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.
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 31 stocks that qualified the screen:
Turtle Beach CorporationHEAR is a premium San Diego, CA-based audio technology company that designs audio products for consumer, commercial and healthcare markets. The stock currently sports a Zacks Rank #1 and has a VGM Score of A. Moreover, the Zacks Consensus Estimate for 2018 earnings remained unchanged at 97 cents per share in the last 30 days. You can see the complete list of today's Zacks #1 Rank stocks here .
Based in Winchester, VA, American Woodmark CorporationAMWD is a manufacturer and distributor of kitchen cabinets and bath and home organization products. The stock currently sports a Zacks Rank #1 and has a VGM Score of A. Moreover, the Zacks Consensus Estimate for fiscal 2019 earnings has surged 25.6% to $7.55 per share in the last 30 days.
Chicago-based Enova International Inc.ENVA is a provider of online financial services. The stock sports a Zacks Rank #1 and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2018 earnings has increased 7% to $2.43 over the last 30 days.
QuinStreet, Inc.QNST , based in Foster City, CA, is a provider of online direct marketing and media services. The Zacks Consensus Estimate for fiscal 2018 earnings increased by a penny to 45 cents over the last 30 days. The stock sports a Zacks Rank #1 and has a VGM Score of B.
Manchester-based Luxfer Holdings PLCLXFR designs, manufactures, and supplies high-performance materials, components, and high-pressure gas-containment devices for healthcare, environmental, protection, and specialty end-markets in Europe, North America, and internationally. The Zacks Consensus Estimate for 2018 earnings remained steady at $1.29 per share in the last 30 days. The stock carries a Zacks Rank #2 and has a VGM Score of A.
Melville, NY-based Verint Systems Inc.VRNT is a provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. The Zacks Consensus Estimate for 2018 earnings remained steady at $3.10 per share in the last 30 days. The stock has a Zacks Rank #2 and a VGM Score of B.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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 reportQuinStreet, Inc. (QNST): Free Stock Analysis ReportTurtle Beach Corporation (HEAR): Free Stock Analysis ReportVerint Systems Inc. (VRNT): Free Stock Analysis ReportEnova International, Inc. (ENVA): Free Stock Analysis ReportAmerican Woodmark Corporation (AMWD): Free Stock Analysis ReportLuxfer Holdings PLC (LXFR): Free Stock Analysis ReportTo read this article on Zacks.com click here.