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4 Solid Net Profit Margin Stocks to Boost Portfolio Returns

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. InterDigital IDCC, Ardmore Shipping Corporation ASC, Inspired Entertainment INSE and Global Ship Lease GSL 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.

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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 40 stocks that qualified the screen:

InterDigital is a pioneer in advanced mobile technologies that enables wireless communications and capabilities. The company designs and develops a wide range of advanced technology solutions, which are used in digital cellular and wireless 3G, 4G and IEEE 802-related products and networks. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.

The Zacks Consensus Estimate for InterDigital’s 2023 earnings has been revised upward by 118% to $6.04 per share in the past 30 days. IDCC surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 170.9%.

Ardmore Shipping engages in the ownership and operation of product and chemical tankers. It provides shipping services to customers through voyage charters, commercial pools and time charters. The company provides seaborne transportation of petroleum products and chemicals worldwide to oil majors, national oil companies, oil and chemical traders, and chemical companies. It currently sports a Zacks Rank of 1 and has a VGM Score of A.

The Zacks Consensus Estimate for Ardmore Shipping’s 2023 earnings has been increased 31 cents to $2.79 per share in the past 30 days. ASC surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 3.5%.

Inspired Entertainment is a games technology company. It supplies Virtual Sports, Mobile Gaming and Server-Based Gaming systems to regulated lottery, betting and gaming operators. The company currently sports a Zacks Rank #1 and has a VGM Score of A.

The Zacks Consensus Estimate for INSE’s 2023 earnings has been revised upward to $1.10 per share from 96 cents in the past 30 days. Inspired Entertainment surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 28%.

Global Ship Lease is a rapidly growing containership charter owner. Incorporated in the Marshall Islands, Global Ship Lease commenced operations in December 2007 with a business of owning and chartering out containerships under long-term, fixed-rate charters to world-class container liner companies. The company sports a Zacks Rank of 1 at present and has a VGM Score of B.

The Zacks Consensus Estimate for Global Ship Lease’s 2023 earnings has been revised upward by 36 cents to $8.87 per share in the past 30 days. GSL surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 15.6%.

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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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InterDigital, Inc. (IDCC) : Free Stock Analysis Report

Global Ship Lease, Inc. (GSL) : Free Stock Analysis Report

Ardmore Shipping Corporation (ASC) : Free Stock Analysis Report

Inspired Entertainment, Inc. (INSE) : Free Stock Analysis Report

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