5 Top Stocks With Powerful Net Profit Margin

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 and the headwinds confronting it.

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 operations and cost-control measures.

Also, higher net profit is indispensable for rewarding stakeholders. Further, strength in the metric not only attracts new investors but also draws well-skilled employees that eventually add to the value of the business.

Moreover, a higher net profit margin as compared to peers lends a company 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 vital 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 complex 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 to analyze a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are 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: Only Zacks Rank #1 (Strong Buy) stocks are allowed. In good markets or bad, Strong Buy stocks continue to outperform. You can see the complete list of today’s Zacks #1 Rank stocks here.

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