Investors regularly watch companies that generate profit. In order to assess the breadth of profits, there is no better indicator than the net profit margin.
A higher net margin emphasizes a company’s efficiency in translating sales into real profits. In addition, this measure gives an overview of the quality of the management of a company and the headwinds weighing on it.
Net profit margin = Net profit / Sales * 100.
Simply put, net income is the amount a business keeps after deducting all costs, interest, depreciation, taxes, and other expenses. In fact, the net profit margin can prove to be a powerful benchmark for assessing the soundness of a company’s operations and its cost control measures.
In addition, a higher net profit is essential to reward stakeholders. Moreover, the strength of the metric attracts not only investors but also skilled employees who end up increasing the value of a business.
In addition, a higher net profit margin than that of its peers gives the company a competitive advantage.
Advantages and disadvantages
Net profit margin helps investors better understand a company’s business model in terms of pricing policy, cost structure, and manufacturing efficiency. Therefore, a high net profit margin is preferred by all categories of investors.
However, the net profit margin as an investment criterion has its set of pitfalls. The measurement varies considerably from sector to sector. While net income is a key metric for measuring investment in traditional industries, it is not that important for technology companies.
In addition, the difference in the accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a difficult task.
Additionally, for companies that prefer to grow through debt rather than equity, higher interest charges typically weigh on bottom line. In such cases, the measurement is rendered ineffective while analyzing the performance of a company.
The winning strategy
A healthy net profit margin and strong 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 return from this strategy.
12-month net margin – Most recent (%) greater than or equal to 0: A high net profit margin indicates strong profitability.
Percentage of variation of BPA F (0) / (F-1) greater than equal to 0: It indicates profit growth.
Average broker rating (1-5) equal to 1: A rating of # 1 indicates the extreme optimism of brokers about the stock.
Rank of Zacks less than or equal to 2: Stocks with a Zacks # 1 (strong buy) or 2 (buy) ranking generally perform better than their peers in all types of market environment. You can see The full list of today’s Zacks # 1 Rank stocks here.
VGM score of A or B: Our research shows that stocks with an VGM score of A or B, when combined with a rank 1 or 2 of Zacks, offer the best upside potential.
Here are six of the 18 actions that qualified the screen:
Lakeland Industries, Inc. LAKE is a global manufacturer and seller of industrial protective clothing and accessories. The stock currently sports a Zacks rank of 1 and has a VGM score of A. Zacks’ consensus estimate for FY2021 earnings has been revised up to $ 4.09 from $ 3.29 in 30 days.
Piper Sandler Business PIPR is a specialized securities firm dedicated to providing high quality financial advice, investment products and transaction execution in selected sectors of the financial services market. The stock currently sports a Zacks rank of 1 and a VGM score of A. Zacks consensus estimate for 2020 earnings has been revised up to $ 8.11 from $ 7.20 in the past 30 days. .
Aviat Networks, Inc. AVNW, formerly known as Harris Stratex Networks, Inc., is a global provider of wireless networking solutions and network management software, backed by a suite of professional service and support. The stock currently sports a Zacks rank of 1 and an VGM score of B. Zacks’ consensus estimate of $ 2.95 for fiscal year 2021 profits has moved 18% north in 60 days. .
Meridian Bioscience, Inc. VIVO is a fully integrated life sciences company that manufactures, markets and distributes a wide range of innovative diagnostic test kits, purified reagents, and enabling biopharmaceutical technologies that help provide answers. This Zacks Rank # 1 stock currently has a VGM score of B. Zacks’ consensus estimate of $ 1.19 for current year earnings has increased 12 cents in 30 days.
Transportation Services, Inc. CSV is one of the leading providers of death care products and services in the United States. It offers a full range of services related to funerals, burials and cremations, including the use of funeral homes and motor vehicles, the provision of burial services at the cemetery, and the management and maintenance of cemetery grounds. Currently, the stock carries a Zacks rank of 2 and a VGM score of A. Zacks’ consensus estimate for current year earnings has been revised 17.4% upwards to $ 1.82 in the last 60 days.
WidePoint Company WYY specializes in providing systems engineering, integration and information technology services to the government sector and commercial markets. The stock carries a Zacks rank of 2 and an VGM score of A, at present. Zacks’ consensus estimate of 30 cents for this year’s profit has risen 50% in the past 60 days.
Get the rest of the actions on the list and start testing this idea and others. All of this can be done with Research Wizard stock picking and backtesting software.
The Research Assistant is a great place to start. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your research assistant trial today. And the next time you read an economic report, open the research assistant, plug in your findings, and see what gems come out of it.
Click here to sign up for a free trial of the Research Assistant today.
Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies is available at: https: //www.zacks.com/performance/.
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 report