Investors focus on businesses that consistently generate profits. The net profit margin is key to assessing profitability. A higher net margin indicates a company's efficiency in converting sales into actual profits, providing insights into its operational effectiveness and the challenges it faces. Companies like Willdan Group, Inc. WLDN, Limbach Holdings, Inc. LMB, Century Aluminum Company CENX and Dave Inc. DAVE exhibit strong net profit margins.
Net Profit Margin = Net Profit / Sales * 100
Net profit represents the amount a company retains after all costs, interest, depreciation, taxes and other expenses are deducted. The net profit margin can be a valuable indicator of a company's operational strength and cost management. Higher net profits are crucial for rewarding stakeholders and attracting skilled employees, ultimately enhancing business value. Additionally, a higher net profit margin compared to competitors provides a competitive edge.
Pros and Cons of Net Profit Margin
Net profit margin offers investors clarity on a company’s business model, including its pricing policy, cost structure and manufacturing efficiency. A strong net profit margin is preferred by all types of investors. However, this metric has its limitations. It varies significantly across industries, and while net income is crucial in traditional sectors, it is less relevant for technology companies. Differences in accounting treatments, particularly for non-cash expenses like depreciation and stock-based compensation, can complicate comparisons.
Moreover, companies that grow through debt rather than equity funding incur higher interest expenses, which can negatively impact net profit. In such cases, the net profit margin becomes less effective for evaluating performance. Despite these challenges, net profit margin remains a fundamental measure for understanding a company's profitability and operational efficiency.
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.
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 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 25 stocks that qualified the screen:
Willdan Group is a provider of professional technical and consulting services to utilities, private industry and public agencies. Nationwide, the company enables its clients to realize cost and energy savings by providing a wide range of specialized services. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A.
The Zacks Consensus Estimate for Willdan’s 2025 earnings has been revised upward to $2.75 per share from $2.35 in the past 30 days. WLDN surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 66.1%.
Limbach provides building systems. The company engineers, constructs and services mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Limbach’s 2025 earnings has been revised upward to $3.45 per share from $3.14 in the past 30 days. LMB surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 42.3%.
Century Aluminum is engaged in the production of primary aluminum in the United States and Iceland. The company produces standard-grade and value-added primary aluminum products, as well as carbon products such as anodes and cathodes. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Century Aluminum’s 2025 earnings has been revised downward by a penny to $3.75 per share in the past 30 days. CENX surpassed the Zacks Consensus Estimate twice in the trailing four quarters while missing the same on two occasions, the average surprise being -63.7%.
Dave is a financial technology company offering banking services, overdraft protection and financial planning tools. The stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for Dave’s 2025 earnings has moved 28.9% north in the past 30 days and currently stands at $6.65 per share. DAVE surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 345.7%.
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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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