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 *
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
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 17 stocks that qualified the screen:
Piper Sandler Companies
is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock currently sports a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for 2021 earnings has been revised upward to $8.15 from $7.50 in the past 30 days.
Mueller Industries, Inc.
specializes in copper and copper alloy manufacturing of products that supports piping systems, climate control systems and various original equipment manufacturer applications. At present, the stock flaunts a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate of $2.48 for the current-year earnings has moved 148% north over the past 30 days.
Lakeland Industries, Inc.
is a worldwide manufacturer and seller of industrial protective clothing and accessories. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward to $4.09 from $3.29 in 60 days’ time.
specializes in providing systems engineering, integration and information technology services to the government sector and commercial markets. The stock flaunts a Zacks Rank of 1 and has a VGM Score of B, at present. The Zacks Consensus Estimate of 16 cents for the ongoing-year earnings has been revised 60% upward over the past 60 days.
Herc Holdings, Inc.
is an equipment rental supplier across North America and in international markets. This Zacks Rank #1 stock has a VGM Score of B, at present. The Zacks Consensus Estimate of $3.31 for 2021 earnings has moved 4 cents north in 30 days’ time.
H&E Equipment Services, Inc.
is one of the largest integrated equipment services companies in the United States with full-service facilities throughout the Intermountain, Southwest, Gulf Coast & Southeast regions of the United States. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $1.64 for this year’s earnings has been revised 5.8% upward 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.
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