Net profit, also referred to as the bottom line, is one of the key tools to determine 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, thus pushing a company into the red. Graham Corporation (GHM – Free Report) , Qifu Technology, Inc. (QFIN – Free Report) , Adtalem Global Education Inc. (ATGE – Free Report) and Strategic Education, Inc. (STRA – Free Report) , however, 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, 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 peers provides a company with 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: A 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.
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 26 stocks that qualified the screen:
Graham designs and builds vacuum and heat transfer equipment for process industries and energy markets worldwide. The company’s products include steam jet ejector vacuum systems and liquid ring vacuum pumps, surface condensers, Heliflows, water heaters and various types of heat exchangers. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Graham’s fiscal 2025 earnings has been revised upward by 8 cents to $1.03 per share in the past seven days. GHM surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 101.9%.
Qifu Technology is a credit-tech platform principally in China that provides a comprehensive suite of technology services to assist financial institutions and consumers and small & medium enterprises in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. The stock has a Zacks Rank of 1 at present and a VGM Score of B.
The Zacks Consensus Estimate for Qifu Technology’s 2024 earnings has been revised downward to $5.04 per share from $5.08 in the past 30 days. QFIN surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 8.6%.
Adtalem Global Education is a leading healthcare education provider and workforce solutions innovator. Currently, the stock carries a Zacks Rank #2 and has a VGM Score of A.
The Zacks Consensus Estimate for Adtalem Global Education’s fiscal 2025 earnings has been revised upward by 9 cents to $5.81 per share in the past 30 days. ATGE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 19.5%.
Strategic Education, through its subsidiaries Strayer University and New York Code and Design Academy (NYCDA), provides a range of post-secondary education and other academic programs in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B.
The Zacks Consensus Estimate for Strategic Education’s 2024 earnings has been revised upward by 11 cents to $4.76 per share in the past seven days. STRA surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 40.4%.
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_disclosure/.
