Investors flock towards companies that consistently rake in profits. When it comes to measuring the depth of profitability, nothing holds a candle to the net profit margin.
A sturdy net margin signifies an entity’s adeptness in translating sales figures into tangible profits. Willdan Group, Inc. (WLDN), EZCORP, Inc. (EZPW), Modine Manufacturing Company (MOD), and Huron Consulting Group Inc. (HURN) stand out with solid net profit margins.
The net profit margin equation is simple: Net profit divided by sales, multiplied by 100.
In essence, net profit is what’s left after deductions of expenses, interests, taxes, and other financial liabilities. This margin serves as a powerful benchmark to assess a company’s operational prowess and cost-effectiveness.
A lofty net profit not only rewards investors but also allures skilled professionals, who in turn amplify the company’s intrinsic value.
Furthermore, a superior net profit margin compared to competitors bestows a competitive stronghold to a company.
The Boons and Banes
Net profit margin offers investors a vivid lens into a company’s pricing strategies, cost structure, and manufacturing efficacy. Hence, a robust net profit margin is a cherished asset for investors across the spectrum.
However, using net profit margin as an investment touchstone has its own set of traps. This metric fluctuates widely across different industries. While net income garners weight in conventional sectors, it may not hold the same sway in the tech domain.
Moreover, the diverse accounting treatments of various elements — particularly non-cash outlays like depreciation and stock-based compensations — complicate comparisons.
Additionally, for enterprises that opt for debt-driven growth over equity funding, elevated interest costs typically burden net profits. In such scenarios, this metric may fall short in evaluating a company’s overall performance.
A Blueprint for Success
A robust net profit margin alongside steady EPS growth stand as the twin pillars of an optimal business model.
In addition to these, we have incorporated a few parameters to maximize returns from this strategy.
Parameters for Selection
Net Margin 12 months – Most Recent (%) greater than or equal to 0: A high net profit margin signifies robust profitability.
Percentage Change in EPS F(0)/(F-1) greater than or equal to 0: This reflects earnings growth.
Average Broker Rating (1-5) equal to 1: A rating of #1 signals extreme bullishness among brokers about the stock.
Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally outshine their peers across varied market conditions.
VGM Score of A or B: Our research indicates that stocks boasting a VGM Score of A or B, coupled with a Zacks Rank of #1 or 2, promise the highest potential for growth.
Here, we delve into our top four picks from the 21 stocks that passed the screening criteria:
Willdan Group offers professional technical and consulting services to utilities, private businesses, and governmental bodies. The stock holds a Zacks Rank #1 and a VGM Score of B.
The Zacks Consensus Estimate projects Willdan Group’s 2024 earnings to surge by 19.9% in the last 30 days, settling at $1.81 per share. Willdan Group beat the Zacks Consensus Estimate thrice in the past four quarters, with an average surprise of 886.3%.
EZCORP focuses on pawnshops for consumer credit and as specialty retailers for pre-owned items. Currently ranked #1 by Zacks, EZCORP also holds a VGM Score of B.
The Zacks Consensus Estimate foresees EZCORP’s fiscal 2024 earnings to climb by 12.9% to $1.05 per share in the last 60 days. EZCORP outperformed the Zacks Consensus Estimate for the past four quarters, with an average surprise of 27.7%.
Modine Manufacturing specializes in the production and sale of heat transfer equipment. With a Zacks Rank of 1 and a VGM Score of B, the company remains robust in the market.
The Zacks Consensus Estimate for Modine Manufacturing’s fiscal 2024 earnings inches up by a penny to $3.27 per share in the previous 30 days. MOD exceeded the Zacks Consensus Estimate each quarter in the last four, with an average surprise of 51.5%.
Huron Consulting Group leads Huron Consulting Services LLC, providing financial and operational consultation. The stock holds a Zacks Rank #2 and a VGM Score of A.
The Zacks Consensus Estimate for Huron Consulting Group’s 2024 earnings sees a penny increase to $5.64 per share in the past 30 days. HURN outshone the Zacks Consensus Estimate in the trailing four quarters, with an average surprise of 25.9%.
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Disclosure: Officers, directors, and employees of Zacks Investment Research could own, sell short, or hold long or short positions in mentioned securities. An affiliated investment advisory firm might also hold positions in these securities.
Disclosure: Performance details for Zacks’ portfolios and strategies can be accessed at: Zacks Performance.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
