Investors rely on net profit margin to pick stocks that ensure maximum returns from the portfolio. Net profit margin is the most effective way to measure a company’s profitability. A proper analysis of the same shows how well a company is run and the way it handles headwinds.

A higher net margin reflects a company’s efficiency in converting sales to actual profits.

Net Profit MarginNet 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 lends the company a competitive edge.

Net Profit MarginNet 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 cost-control measures.

Also, higher net profit is essential for rewarding stakeholders. Net margin helps investors judge the risk involved in an investment. Creditors also view it as crucial to determining a company’s ability to pay off debts.

Moreover, a higher net profit margin compared to its peers lends 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.

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.

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 six of the 35 stocks that qualified the screen:

Black Mountain, NC-based Ingles Markets, Inc. IMKTA is a leading supermarket chain with operations in the Southeast United States. The Zacks Consensus Estimate of $3.9 for fiscal 2019 earnings has been revised 14.7% upward in the past 30 days. The stock has a Zacks Rank of 1 and a VGM Score of A.

North American Construction Group Ltd. NOA is involved primarily in providing services related to mining and heavy construction. The stock is Zacks #1 Ranked and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings has been raised 29% to $1.38 in the past 30 days.

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 has been inched 5.6% up to $3.56 in the past 30 days.

Domiciled in St. George, UT, SkyWest, Inc. SKYW operates a regional airline in the United States. The stock has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of $6.18 has moved 1.3% north in the past 30 days.

Headquartered in Oak Brook, IL, Great Lakes Dredge & Dock Corp. GLDD provides dredging services in the United States and internationally. The stock is Zacks #2 Ranked and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of 72 cents has been raised 5.9% 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 in all markets of the real estate industry. The stock is a #2 Ranked player and has a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings has been revised 3.8% upward to $2.71 in the past 30 days.



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