Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends insight into how well a company is run and the headwinds weighing on it. Arcos Dorados Holdings Inc. ARCO, Karat Packaging Inc. KRT, The Andersons, Inc. ANDE and Option Care Health, Inc. OPCH 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 attracts investors and draws well-skilled employees, who eventually enhance business value.
Moreover, a higher net profit margin compared with its peers provides the 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.
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 33 stocks that qualified the screen:
Arcos Dorados operates as a franchisee of McDonald’s, with its operations divided in Brazil, North Latin America, South Latin America and the Caribbean divisions. It also runs quick-service restaurants in Latin America and the Caribbean. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 earnings has been revised upward by 2 cents to 78 cents per share in the past 60 days. ARCO surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 35%.
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 60 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%.
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. 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 10 cents to $3.12 per share in the past 30 days. ANDE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 64.4%.
Option Care Health provides infusion and home care management solutions. The company offers products, services and condition-specific clinical management programs for gastrointestinal abnormalities, infectious diseases, cancer, organ and blood cell transplants, bleeding disorders and heart failures. It currently flaunts a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Option Care Health’s 2023 earnings has remained unchanged at $1.42 per share in the past 60 days. OPCH surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 57%.
The Andersons, Inc. (ANDE): Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
Option Care Health, Inc. (OPCH): Free Stock Analysis Report
Karat Packaging Inc. (KRT): Free Stock Analysis Report
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Zacks Investment Research
This article originally appeared on Zacks
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