Investors eye businesses tha t report profits on a regular basis. In order to gauge the extent of profit, there is no better metric than net profit margin.
A higher net margin reflects a company's efficiency in converting sales into actual profit. Moreover, this metric lends an insight into how well a company is run and the headwinds faced by 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 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 that eventually add to the value of the business.
Moreover, a higher net profit margin compared to its peers gives 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.
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 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 Scoreof 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 28 stocks that qualified the screen:
Chicago, IL-based SP Plus CorporationSP is a provider of professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry. The stock is a Zacks #1 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings has risen by a penny to $2.60 in the past 30 days.
Headquartered in St. George, UT SkyWest, Inc.SKYW operates a regional airline in the United States. The stock has a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of $5.78 has jumped 5% in the past 30 days.
Based in Ness Ziona, Israel, Kamada Ltd.KMDA develops, produces and markets specialty plasma-derived protein therapeutics.The stock is a Zacks #1 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings has increased 34% to 47 cents the past 30 days.
Fremont, CA-headquarterd SYNNEX CorporationSNX is a global information technology supply chain services company, offering a comprehensive range of services to original equipment manufacturers, software publishers and reseller customers worldwide. The stock has a Zacks Rank #1 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings per share has remained constant at $11.81 over the past 30 days.
Headquartered in Evansville, IN, Shoe Carnival, Inc . SCVL offers a broad assortment of moderately priced dress, casual and athletic footwear for men, women and children with an emphasis on national and regional name brands. The Zacks Consensus Estimate for fiscal 2019 bottom line of $2.42 has remained unchanged in the past 30 days. The stock has a Zacks Rank #1 and a VGM Score of A.
Stamford, CT-based Information Services Group, Inc.III is a technology research and advisory company with global operations. The stock is a #2 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings has been stable at 40 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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