Monday, October 11, 2021

Online stock filtering and screening by profit margins and profit growth

Beside analysing stock counters investability using Return of Equity (ROE) and Return of Assets (ROA), it is also imperative in fundamental analysis to evaluate the business profitability of the stock counters. This can be achieved by looking into their profit margins and profit growth rate.

Operating profit is the profit (i.e. revenue minus the cost of goods sold) derived from the company's core business operations. Operating profit margin is the percentage of operating profit portion divided by total revenue.

A company with higher operating profit margin usually has more room to give discount (i.e. temporary lowering the profit margin in order to secure a deal), and therefore more financially healthy.

Companies which are able to maintain a high operating profit margin all the time are usually having high competition barrier, protecting them from being forced into price war with competitors. 

The operating profit margin is usually going along with the industry. Industries with generally high profit margin including high technology, cosmetics, premium consumer brands, etc. If a company's operating profit margin is above its industry average, it indicates that its management team is more capable in bringing in business profit than its industry peers.

Pretax profit is the profit that takes into account both operating income and non-operating income. Examples of non-operating income including investment gains, forex gains, profit from selling out fixed assets, etc. Pretax profit is also known as earnings before interest and tax (EBIT).

Usually, a company will have pretax profit margin that is slightly lower than its operating profit margin. If its pretax profit margin is higher than its operating profit margin, it indicates that the company is making more profit from non-operating revenue than its core business revenue.

Here is an example to perform stock filtering and screening in Rakuten Trade based on profit margins.

Login to Rakuten Trade online trading website, select the Stock Screener menu, add a new filtering criterion, and select Operating Margin (%). Set its minimum to 35%.

Then, add in another filtering criterion Pretax Margin (%). Set its minimum to 30%.

Beside having good profit margins, we might also want to see the company's profit growth year by year. Therefore, select the 3rd filtering criterion Pretax Profit Growth Rate (%) and set its minimum to 10%.

You will instantly get the list of matching stocks on your screen, which is around 40 to 50 counters at the time being.

Combined with our 2 filters of ROE and ROA, the list will be left with only around 10 counters.

You will see some rubber glove counters in the list. The rubber glove industry has been enjoying an exceptional good profit margin over the past 2 years. The question you need to ask as an investor is that: does this good profit margin sustainable, at least for another upcoming year?

Note that companies with low profit margin does not necessary mean that their industry is not profitable, provided that they are able to generate their profit by high volume of sales. Example of such industries including grocery trading, essential food trading, etc.

If you don't have a Rakuten Trade account to access to the Stock Screener above, you can use this link to open a new Rakuten Trade account for free, including no charge for opening new CDS account. By opening account with the link, you can get 500 RT Points within 30 days upon your account activation. Beside that, if you start your trading within the first 10 business days after account activation, your first online trading brokerage fee will be rebated as additional RT Points as well.


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