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. Limbach Holdings, Inc. LMB, The Andersons, Inc. ANDE, Karat Packaging Inc. KRT and Graham Corporation GHM 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 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.
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 30 stocks that qualified the screen:
Limbach Holdings provides building systems. The company engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. The company currently flaunts a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for LMB’s 2023 earnings has been revised upward to $1.36 per share from $1.12 in the past 30 days. Limbach Holdings surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 81.4%.
Andersons is a regional grain merchandiser with diversified businesses in agriculture, plant nutrient formulation and distribution, turf product production, railcar marketing and general merchandise retailing that generate revenues. The company maintains grain and production facilities throughout the Midwest and six retail locations in northern and central Ohio. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Andersons’ 2023 earnings has been revised upward by 52 cents to $2.90 per share in the past 30 days. ANDE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 64.4%.
Karat Packaging is a specialty distributor and manufacturer of disposable food service products and related items. Its products include food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves and other products. The stock flaunts a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Karat Packaging’s 2023 earnings has been revised upward by 40 cents to $1.83 per share in the past 30 days. KRT surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 48.8%.
Graham Corporation 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. Currently, the stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for Graham Corporation’s fiscal 2024 earnings has been revised upward by 6 cents to 15 cents per share in the past 30 days. GHM surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 243.1%.
The Andersons, Inc. (ANDE): Free Stock Analysis Report
This article originally appeared on Zacks
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