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 an insight into how well a company is run and the headwinds weighing on it. DLH Holdings DLHC, Franklin Covey FC, Cowen Group COWN and Fidelity National Title Group FNF 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.

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 35 stocks that qualified the screen:

DLH Holdings serves clients throughout the United States as a full-service provider of healthcare, logistics, and technical support services to the Department of Defense and Federal agencies. The company sports a Zacks Rank of 1 at present and has a VGM Score of A.

The Zacks Consensus Estimate for DLH Holdings’ fiscal 2022 earnings has been revised upward to $1.25 from $1.09 in the past 60 days. DLHC surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 14.1%.

Franklin Covey is an international learning and performance solutions company dedicated to increasing the effectiveness of individuals and organizations. The company has a Zacks Rank of 1 at present and a VGM Score of B.

The Zacks Consensus Estimate for Franklin Covey’s fiscal 2022 earnings has been revised upward to 76 cents from 60 cents in the past 30 days. The FC stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 311%.

Cowen Group, through its operating subsidiaries, provides investment banking, equity research, sales and trading, asset management and alternative asset management services to companies and institutional investor clients in the healthcare, technology, telecommunications, aerospace and defense, consumer and alternative energy sectors. This Zacks Rank #1 company currently has a VGM Score of B.

The Zacks Consensus Estimate of $7.31 for Cowen Group’s current-year earnings has moved 6.4% north in the past 30 days. COWN stock surpassed the Zacks Consensus Estimate in the last four quarters, the average surprise being 27.1%.

Fidelity National Title Group is a leading provider of title insurance, specialty insurance and claims management services. The company sports a Zacks Rank of 1 at present and has a VGM Score of B.

The Zacks Consensus Estimate for Fidelity National Title Group’s 2022 earnings has been revised upward to $5.90 from $5.64 in the past 60 days. FNF surpassed the Zacks Consensus Estimate in the trailing four quarters, the average beat being 38.2%.

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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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Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
 
Cowen Group, Inc. (COWN) : Free Stock Analysis Report
 
Franklin Covey Company (FC) : Free Stock Analysis Report
 
DLH Holdings Corp. (DLHC) : Free Stock Analysis Report
 
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