Net profit, also referred to as the bottom line, is one of the key tools determining the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.
A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red. Arcos Dorados Holdings Inc. ARCO, TimkenSteel Corporation TMST, Global Ship Lease, Inc. GSL and NOW, Inc. DNOW boasts 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, 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 business value.
Moreover, a higher net profit margin compared with its peers provides 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 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.
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 environments. 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 discuss our four picks from the 53 stocks that qualified the screen:
Arcos Dorados operates as a franchisee of McDonald’s with its operations divided in Brazil, the North Latin America division, South Latin America and the Caribbean division. It also runs quick-service restaurants in Latin America and the Caribbean. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 earnings has been revised upward by a penny to 40 cents per share in the past seven days. ARCO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 37.5%.
TimkenSteel engages in manufacturing alloy steel, as well as carbon and micro-alloy steel. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for TimkenSteel’s 2022 earnings has been revised upward to $ 3.80 from $ 3.55 in the past seven days. TMST surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 41.3%.
Global Ship Lease is a rapidly growing containership charter owner. Incorporated in the Marshall Islands, Global Ship Lease commenced operations in December 2007 with a business of owning and chartering out containerships under long-term, fixed-rate charters to world-class container liner companies. At present, the stock has a Zacks Rank # 1 and a VGM Score of A.
The Zacks Consensus Estimate of $ 7.79 for Global Ship Lease’s current-year earnings has moved 7.4% north in the past 60 days. GSL surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 44.6%.
NOW is a distributor to the energy and industrial sectors. It stocks and sells a comprehensive offering of products for the upstream, midstream, and downstream & industrial market segments. NOW sports a Zacks Rank of 1, at present, and has a VGM Score of B.
The Zacks Consensus Estimate for NOW’s 2022 earnings has been revised upward by a penny to 43 cents per share in the past 30 days. DNOW surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 114.2%.
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/.
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
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
Global Ship Lease, Inc. (GSL): Free Stock Analysis Report
Timken Steel Corporation (TMST): Free Stock Analysis Report
NOW Inc. (DNOW): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research