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, thus pushing a company into the red. OneSpaWorld Holding OSW, Modine Manufacturing MOD, Cavco Industries CVCO and Arcos Dorados Holdings ARCO 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, 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 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 35 stocks that qualified the screen:
OneSpaWorld is a provider and innovator in the fields of wellness, beauty, rejuvenation, and transformation on cruise ships and land. The company's service includes traditional and alternative massage, body and skincare treatment options, ayurvedic treatments, comprehensive hair and nail services, fitness, acupuncture, herbal medicine, pain management and medi-spa. The stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate of 49 cents for OneSpaWorld’s current-year earnings has moved a penny north in the past seven days. OSW surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 84.2%.
Modine Manufacturing operates primarily in a single industry consisting of the manufacture and sale of heat transfer equipment. This includes heat exchangers for cooling all types of engines, transmissions, auxiliary hydraulic equipment, air conditioning components used in cars, trucks, farm and construction machinery and equipment, and heating and cooling equipment for residential and commercial building HVAC (heating, ventilating, air conditioning and refrigeration equipment). The company currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Modine Manufacturing’s fiscal 2023 earnings has remained unchanged at $1.76 per share in the past 60 days. MOD surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 56.1%.
Cavco Industries designs and produces factory-built housing products primarily distributed through a network of independent and company-owned retailers. The company is one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments, marketed under a variety of brand names, including Cavco Homes, Fleetwood Homes, Palm Harbor Homes, Fairmont Homes and Chariot Eagle. The company carries a Zacks Rank #2 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Cavco Industries’ fiscal 2023 earnings has been revised upward by 20 cents to $27.36 per share in the past 30 days. CVCO surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 42.7%.
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 carries a Zacks Rank of 2 and has a VGM Score of A.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 earnings has been revised upward by 4 cents to 61 cents per share in the past 30 days. ARCO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 109.4%.
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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/.
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