Net profit is one of the most significant metrics used in corporate finance to determine the affluence of a company. A proper analysis of this metric lends an insight into how well a company is run and the headwinds confronting it.
In fact, a higher net margin reflects the company’s efficiency at converting sales into actual profit.
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.
Net margin helps investors assess 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, the strength in the metric not only attracts investors but also draws well-skilled employees who eventually add to the value of the business.
Moreover, a higher net profit margin as compared to peers lends 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 crucial 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 for the analysis of 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.
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 prospects of the stock.
Zacks Rank equal to 1: In good markets or bad, stocks with a Zacks Rank #1 (Strong Buy) continue to outperform. 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 (Buy) offer the best upside potential.
Here are the four stocks that qualified the screen:
Headquartered in London and New York, BGC Partners Inc. (NASDAQ:BGCP) is a reputed global brokerage company servicing the financial and real estate markets. The stock has a VGM score of ‘B’. Moreover, the Zacks Consensus Estimate for fiscal 2017 earnings remained steady at $1.00 over the last 30 days.
Hong Kong-based UTStarcom Holdings Corp. (NASDAQ:UTSI) is engaged in providing interactive Protocol based network solutions. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2017 remained unchanged at a loss of a penny over the last 30 days.
New Albany, OH-based Commercial Vehicle Group Inc. (NASDAQ:CVGI) designs, engineers, produces and sells various cab related products and systems. The company has a VGM Score of ‘A’ and an average four-quarter positive earnings surprise of 161.11%. The Zacks Consensus Estimate for 2017 earnings surged 41.4% to 41 cents over the last 30 days.
Santiago, Chile-based Embotelladora Andina S.A. AKO.B produces and distributes Coca-Cola products in Chile, Brazil and Argentina. The company has a VGM Score of ‘A’ and an average four-quarter positive earnings surprise of 804.69%. The Zacks Consensus Estimate for 2017 earnings rose 6.8% to $1.10 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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UTStarcom Holdings Corp (UTSI): Free Stock Analysis Report
Commercial Vehicle Group, Inc. (CVGI): Free Stock Analysis Report
Embotelladora Andina S.A. (AKO.B): Free Stock Analysis Report
BGC Partners, Inc. (BGCP): Free Stock Analysis Report
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