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Net profit also referred to as the bottom line, is one of the key tools that determines 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 (net loss).

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 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.

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.

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 five of the 36 stocks that qualified the screen:

Piper Sandler Companies (PIPR Quick Quote PIPR - Free Report) is a focused securities firm dedicated to delivering superior financial advice, investment products, and transaction execution within selected sectors of the financial services marketplace. The stock currently flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for 2021 earnings moved up to $17.09 from $12.90 in the past 30 days.

Mueller Industries, Inc. (MLI Quick Quote MLI - Free Report) is a leading manufacturer of copper tube and fittings; brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate of $6.25 for current-year earnings moved 52.4% north over the past 30 days.

Global Ship Lease, Inc. (GSL Quick Quote GSL - Free Report) engages in owning and chartering out containerships under long-term, fixed-rate charters to world-class container liner companies. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for the ongoing-year earnings has been revised upward to $3.37 from $3.20 in the past seven days.

Medifast, Inc. (MED Quick Quote MED - Free Report) is a leading manufacturer and distributor of clinically proven healthy living products and programs. The company produces, distributes, and sells weight loss, weight management, and healthy living products through its direct online channels as well as franchise weight control centers. The stock currently carries a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for this year’s earnings has been revised upward to $13.83 from $13.74 in seven days’ time.

Bassett Furniture Industries, Inc. (BSET Quick Quote BSET - Free Report) is a leading manufacturer and marketer of high-quality, mid-priced home furnishings. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $2.11 for fiscal 2021 earnings has been revised 19.2% upward over the past 60 days.