Net profit margin is the most important entry in an income statement as it demonstrates the affluence of a company. It determines a company’s efficiency in deploying its resources, making it the best metric to measure its profitability.
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.
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 five of the 23 stocks that qualified the screen:
Headquartered in Evansville, IN, Shoe Carnival, Inc. SCVL offers men, women and children a broad assortment of moderately priced dress, casual and athletic footwear with emphasis on national and regional brands. The Zacks Consensus Estimate for fiscal 2020 bottom line has moved 3.6% north to $2.88 in the past 30 days. The stock has a Zacks Rank of 1 and a VGM Score of A.
Chicago-based Enova International Inc. ENVA is a provider of online financial services. The stock is a #1 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings of $3.97 has been constant in the past 30 days.
Irvine, CA-based Tilly's Inc. TLYS is a specialty retailer in the action sports industry, selling clothing, shoes and accessories. The stock is Zacks #1 Ranked and has a VGM Score of A. Further, the Zacks Consensus Estimate for fiscal 2020 earnings of 88 cents has been revised 6% upward in the past 30 days.
Chicago, IL-based SP Plus Corporation SP is a provider of professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers across all markets of the real estate industry.The company is #1 Ranked and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2019 earnings has been stable at $2.79 in the past 30 days.
Beijing-headquartered Momo Inc. MOMO provides mobile-based social networking platform, primarily in the Peoples Republic of China. The stock is a #1 Ranked player and has a VGM Score of B. The Zacks Consensus Estimate of $2.8 for fiscal 2019 earnings has been raised 1.8% over the past 30 days.