- 25 октября 2017, 16:33
- Zacks Investment Research
As the primary motive of any investor is to generate maximum returns, companies raking in huge profits make solid picks.
Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same reveals how well a company is run in the face of headwinds.
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’s operations and cost-control measures.
Higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.
Moreover, a higher net profit margin as compared to peers lends a competitive edge. Strength in the metric not only attracts investors but also draws well-skilled employees that eventually add to the value of the business.
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 the 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 other 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 of the stock.
Zacks Rank less than or equal to 2: Stocks having 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 four of the 11 stocks that qualified the screen:
Headquartered in Racine, WI, Modine Manufacturing Company MOD is a designer, manufacturer and distributor of thermal management systems and components for several end markets. The stock sports a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2018 earnings has increased a couple of cents to $1.40 over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
New Albany, OH-based Commercial Vehicle Group Inc. CVGI supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market. The stock has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for fiscal 2017 earnings remained steady at 36 cents over the last 30 days.
France-based Arkema SA ARKAY is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. The stock has a Zacks Rank #2 and a VGM Score of A. Moreover, the Zacks Consensus Estimate for 2017 earnings has increased a couple of cents to $8.53 over the last 30 days.
Willdan Group Inc. WLDN is a provider of professional technical and consulting services to utilities, private industry, and public agencies at all levels of government. The stock sports a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2017 earnings increased 6 cents to $1.16 over the last 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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Commercial Vehicle Group, Inc. (CVGI): Free Stock Analysis Report
Modine Manufacturing Company (MOD): Free Stock Analysis Report
Arkema SA (ARKAY): Free Stock Analysis Report
Willdan Group, Inc. (WLDN): Free Stock Analysis Report
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