Investors flock to a business that reports profits on a regular basis. And to gauge the extent of profit, there is no better metric than the net profit margin.

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 in a company’s operations and cost-control measures.

Higher net profit is indispensable for rewarding stakeholders. Net margin helps investors judge the risks of investing in a company. Creditors also view it as a major factor in determining a company’s ability to pay off debts.

Moreover, a higher net profit margin as compared to peers lends a competitive edge. Also, strength in the metric not only attracts new investors but also draws well-skilled employees that eventually add to the value of the business.

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.

Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison an uphill task.

Further, for companies preferring to grow with debt, instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective to analyze 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 other 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 of the stock.

Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment. 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 are five of the 14 stocks that qualified the screen:

France-based Arkema SA ARKAY is engaged in the manufacturing and marketing of vinyl products, industrial chemicals, and performance products. The stock has a VGM SScore of ‘A’. Moreover, 2017 earnings estimates remained steady at $7.61 per share over the last 30 days.

Headquartered in London and New York, BGC Partners Inc. BGCP is a reputed global brokerage company serving the financial and real estate markets. The stock has a VGM Score of ‘A’. Notably, the Zacks Consensus Estimate for fiscal 2017 earnings has increased by a penny to $1.01 over the last 30 days.

Headquartered in Sioux Falls, SD, Meta Financial Group Inc. CASH is involved in several businesses that include retail banking, electronic payment, insurance premium financing and tax refund solutions. The company has a VGM Score of ‘B’. Further, 2017 earnings estimates remained steady at $5.51 per share over the last 30 days.

SYNNEX Corporation SNX is a global IT supply chain services company offering a comprehensive range of services to original equipment manufacturers and software publishers and reseller customers worldwide. The stock has a VGM Score of ‘B’. Moreover, 2017 earnings estimates rose 4.8% to $8.44 per share over the last 30 days.

Ituran Location and Control Ltd. ITRN provides location-based services, primarily consisting of stolen vehicle recovery and tracking services, as well as wireless communications products used in connection with its location-based services and various other applications. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for 2017 earnings remained steady at $2.03 over the last 30 days.