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 * 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 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.
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 seven of the 25 stocks that qualified the screen:
Gibraltar Industries, Inc. ROCK manufactures and distributes products to the industrial and buildings market. These products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $3.01 for 2020 earnings has been revised upward by 17 cents in the past 60 days.
CBIZ, Inc. CBZ provides professional business services that help clients better manage their finances and employees. At present, this Zacks #1 Ranked player has a VGM Score of B. The Zacks Consensus Estimate of $1.40 for current-year earnings moved up 8 cents over the past 60 days.
Integer Holdings Corporation ITGR manufactures and develops medical devices and components primarily for original equipment manufacturers, which depend on it to design, develop and produce intellectual property protected medical device technologies. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate of $5.20 for ongoing-year earnings moved 24 cents north in 60 days’ time.
BioSpecifics Technologies Corporation BSTC is engaged in the business of producing and licensing, for sale by other, a U.S. Food and Drug Administration (FDA)-approved enzyme derived from collagenase, named Collagenase ABC, and researching, developing and clinically testing additional products derived therefrom for potential use as pharmaceuticals. At present, this Zacks #1 Ranked player has a VGM Score of B. The Zacks Consensus Estimate of $3.79 for this year’s earnings moved upward by four cents over the past 60 days.
DHT Holdings DHT operates a fleet of double-hull crude oil tankers on international routes. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate of $2.11 for ongoing-year earnings has been revised upward by $1.00 in the past 60 days.
Coherus Biosciences, Inc. CHRS is a biologics platform company developing biosimilar therapeutics. Currently, the stock carries a Zacks Rank of #2 and has a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has been revised to $1.89 from $1.66 in the past 60 days.
Euronav EURN is a tanker company. It owns, operates and manages a fleet of vessels for the transportation and storage of crude oil and petroleum products. The stock currently sports a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $2.70 for 2020 earnings has been revised upward by 82 cents in the past 60 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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CBIZ, Inc. (CBZ) : Free Stock Analysis Report
BioSpecifics Technologies Corp (BSTC) : Free Stock Analysis Report
Gibraltar Industries, Inc. (ROCK) : Free Stock Analysis Report
DHT Holdings, Inc. (DHT) : Free Stock Analysis Report
Coherus BioSciences, Inc. (CHRS) : Free Stock Analysis Report
Euronav NV (EURN) : Free Stock Analysis Report
Integer Holdings Corporation (ITGR) : Free Stock Analysis Report
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