Investors prefer to put their money into 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 18 stocks that qualified the screen:
Griffon Corporation GFF is a diversified management and holding company engaged in manufacturing home and building products, consumer and industrial products, and defense electronics products. At present, the stock has a Zacks Rank of 1 and a VGM Score of B. The Zacks Consensus Estimate of $1.52 for fiscal 2020 earnings has been revised upward by 76.7% 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 flaunting a Zacks Rank #1, has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 41.2% to $3.29 in the past 60 days.
Flexible Solutions International Inc. FSI is an environmental company focused on research, development and manufacturing of products that save water and energy. At present, this Zacks #2 Ranked player has a VGM Score of A. The Zacks Consensus Estimate of 33 cents for current-year earnings has moved up by 50% over the past 60 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 has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 20.3% to $2.79 in the past 60 days.
Gibraltar Industries, Inc. ROCK manufactures and distributes building products for the industrial, infrastructure, residential, renewable energy, and conversation markets. The products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions. The stock currently has a Zacks Rank of 2 and a VGM Score of B. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 24.8% to $2.97 in 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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Gibraltar Industries, Inc. (ROCK): Free Stock Analysis Report
Lakeland Industries, Inc. (LAKE): Free Stock Analysis Report
Flexible Solutions International Inc. (FSI): Free Stock Analysis Report
Griffon Corporation (GFF): Free Stock Analysis Report
360 Finance, Inc. Sponsored ADR (QFIN): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.