Net profit, also referred to as the bottom line, is one of the key tools that determines the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red (net loss).
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 businessvalue.
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.
Screening Parameters
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 five of the 20 stocks that qualified the screen:
Mueller Industries (NYSE:MLI), Inc. MLI 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 60 days.
Herc Holdings (NYSE:HRI), Inc. HRI is an equipment rental supplier across North America and in international markets. This Zacks Rank #1 Ranked stock has a VGM Score of B, at present. The Zacks Consensus Estimate of $3.35 for 2021 earnings has moved 8 cents north in 30 days’ time.
Lakeland Industries (NASDAQ:LAKE), Inc. LAKE 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 the last 60 days.
MainStreet Bancshares Inc. MNSB is a full-service bank. The bank provides deposits, makes loans and other services for the public. At present, the stock carries a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $1.85 for the current-year earnings has moved 22.5% north over the past seven days.
Piper Sandler (NYSE:PIPR) Companies PIPR 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 carries a Zacks Rank of 2 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 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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Mueller Industries, Inc. (MLI): Free Stock Analysis Report
Lakeland Industries, Inc. (LAKE): Free Stock Analysis Report
Herc Holdings Inc. (HRI): Free Stock Analysis Report
MainStreet Bank (MNSB): Free Stock Analysis Report
Piper Sandler Companies (PIPR): Free Stock Analysis Report
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