Net profit, also referred to as the bottom line, is one of the key tools that gauges the financial health of an enterprise. The figure demonstrates a company’s ability to convert per dollar sales into profits.

A low profit margin indicates higher risks, implying that a drop in revenues might dent profits, pushing the company in the red (net loss).

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 gives 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.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 six of the 25 stocks that qualified the screen:

Headquartered in Wilmington, OH, Air Transport Services Group, Inc. ATSG provides air cargo transportation and related services to domestic and foreign air carriers, and other companies that outsource their air cargo lift requirements. The stock has a Zacks Rank #1 and a VGM Score of A. Further, the Zacks Consensus Estimate for 2019 earnings has been stable at $1.32 over the past 30 days.

Based in Bedford, MA Progress Software Corporation PRGS is a developer of business applications with global operations. The stock has a Zacks Rank of 1 and a VGM Score of B. Further, the Zacks Consensus Estimate for fiscal 2019 earnings has inched 3.2% up to $2.59 in the past 30 days.

Lisle, IL-based SunCoke Energy, Inc. SXC is a producer of metallurgical coke in the Americas. The stock has a Zacks Rank #2 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings has been revised 28.6% upward to 90 cents in the past 30 days.

Domiciled in Oak Brook, IL, Great Lakes Dredge & Dock Corp. GLDD provides dredging services in the United States and internationally. The stock has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of 68 cents has been reiterated in the past 30 days.

Bonita Springs, FL-based Herc Holdings Inc. HRI designs, manufactures and distributes specialty vehicles in the United States, Canada, Europe, Africa, the Middle East, Latin America, the Caribbean and internationally. The stock is a Zacks #2 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings has been intact at $3.21 over the last 30 days.

Fremont, CA-headquartered SYNNEX Corporation SNX  is a global information technology supply chain services company, offering a comprehensive range of services to original equipment manufacturers, software publishers and reseller customers, worldwide. The stock is a #2 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2019 earnings of $12.1 has been flat over the last 30 days.

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