Investors prefer to put their money in businesses that reap profits on a regular basis. To gauge the extent of profits, there is no better metric than net profit margin.
A higher net margin reflects a company’s efficiency in converting sales into actual profits. StoneX Group Inc. SNEX, Universal Technical Institute, Inc. UTI, Climb Global Solutions, Inc. CLMB and BGC Group, Inc. BGC 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 not only attracts investors but also draws well-skilled employees who eventually enhance a business's 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.
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 34 stocks that qualified the screening:
StoneX Group provides financial services. Through its subsidiaries, the company offers execution, post-trade settlement, clearing and custody services. The stock sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate for StoneX Group’s fiscal 2025 earnings has moved 59 cents north in the past 30 days and currently stands at $8.04 per share. SNEX surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 12.9%.
Universal Technical Institute provides technical education training in automotive, diesel, collision repair and refinishing, motorcycle, marine and personal watercraft technologies. The stock currently sports a Zacks Rank #1 and has a VGM Score of A.
The Zacks Consensus Estimate of 97 cents per share for Universal Technical Institute’s fiscal 2025 earnings has moved 5 cents north in the past 30 days. UTI surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing on one occasion, the average surprise being 54.6%.
Climb Global Solutions is a value-added IT distribution and solutions company specializing in emerging and disruptive technologies. The company provides IT distribution and solutions for emerging companies, principally in the security, data management, connectivity, storage & HCI, virtualization & cloud, and software & ALM industries. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.
The Zacks Consensus Estimate for Climb Global Solutions’ 2024 earnings has been revised upward to $4.14 per share from $3.28 in the past 30 days. CLMB surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing on one occasion, the average surprise being 51.1%.
BGC Group is a brokerage and financial technology company. It specializes in the brokerage of a broad range of products, including fixed income, foreign exchange, equities, energy and commodities, shipping and futures. At present, the stock sports a Zacks Rank #1 and has a VGM Score of B.
The Zacks Consensus Estimate for BGC Group’s 2024 earnings has been revised upward by 6 cents to 99 cents per share in the past 30 days. BGC surpassed the Zacks Consensus Estimate twice in the trailing four quarters while matching on two occasions, the average surprise being 4.5%.
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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/.
Must-See: Solar Stocks Poised to Skyrocket
The solar industry stands to bounce back as tech companies and the economy transition away from fossil fuels to power the AI boom.
Trillions of dollars will be invested in clean energy over the coming years – and analysts predict solar will account for 80% of the renewable energy expansion. This creates an outsized opportunity to profit in the near-term and for years to come. But you have to pick the right stocks to get into.
BGC Group, Inc. (BGC) : Free Stock Analysis Report
Universal Technical Institute Inc (UTI) : Free Stock Analysis Report
StoneX Group Inc. (SNEX) : Free Stock Analysis Report
Climb Global Solutions, Inc. (CLMB) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
