The primary purpose of a business is to generate profits that can be reinvested in expansion or utilized for rewarding a company’s shareholders. Net profit margin is an effective tool for measuring the profits reaped by a business.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends an insight into how well a company is run and what are the headwinds weighing on it.
Euroseas
ESEA
,
DLH Holdings
DLHC
,
Franklin Covey
FC
and
Cowen Group
COWN
boast solid net profit margins.
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, the 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 a business’ value.
Moreover, a higher net profit margin compared with its peers provides a 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 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 we have picked four stocks – Euroseas, DLH Holdings, Franklin Covey and Cowen Group – from the 37 stocks that qualified the screen:
Euroseas
was formed under the laws of the Republic of the Marshall Islands to consolidate the ship-owning interests of the Pittas family of Athens, Greece, which has been in the shipping business for the last 136 years. It operates in the dry cargo, dry bulk and container shipping markets. At present, the stock has a Zacks Rank #1 and a VGM Score of A.
The Zacks Consensus Estimate of $14.54 for Euroseas’ current-year earnings has moved 12.4% north in the past 30 days. ESEA surpassed the Zacks Consensus Estimate once in the trailing four quarters while missing the same on three occasions, the average negative surprise being 60.7%.
DLH Holdings
serves clients throughout the United States as a full-service provider of healthcare, logistics, and technical support services to the Department of Defense and federal agencies. The company sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for DLH Holdings’ fiscal 2022 earnings has been revised upward to $1.34 from $1.25 in the past seven days. DLHC surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 19.5%.
Franklin Covey
is an international learning and performance solutions company dedicated to increasing the effectiveness of individuals and organizations. The company has a Zacks Rank of 1 at present and a VGM Score of B.
The Zacks Consensus Estimate for Franklin Covey’s fiscal 2022 earnings has been revised upward to 76 cents from 60 cents in the past 30 days. The FC stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 311%.
Cowen Group
, through its operating subsidiaries, provides investment banking, equity research, sales and trading, asset management and alternative asset management services to companies and institutional investor clients in the healthcare, technology, telecommunications, aerospace and defense, consumer and alternative energy sectors. This Zacks Rank #2 company currently has a VGM Score of A.
The Zacks Consensus Estimate of $7.31 for Cowen Group’s current-year earnings has moved 6.4% north in the past 30 days. COWN stock surpassed the Zacks Consensus Estimate in the last four quarters, the average surprise being 27.1%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today
.
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/
.
Just Released: Zacks Top 10 Stocks for 2022
In addition to the investment ideas discussed above, would you like to know about our 10 top buy-and-hold tickers for the entirety of 2022?
Last year’s 2021
Zacks Top 10 Stocks
portfolio returned gains as high as +147.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys
Access Zacks Top 10 Stocks for 2022 today >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report