Close

Stocks With a Competitive Edge

by John Bajkowski

Stocks With A Competitive Edge Splash image

Earnings are dependent on the ability of a company to convert sales into profits. Converting a large and growing proportion of sales into earnings often points to firms that have a competitive advantage, due to brand-name loyalty, a limited niche, or even patent protection. The First Cut this issue screens for companies turning a larger percentage of sales into gross profits, operating profits and net profits.

Gross profit margin is calculated by dividing gross income (sales less the cost of goods sold) by sales. It reflects the firm’s basic pricing decisions and its material costs.

Operating profit margin is calculated by dividing operating income by sales. Operating income represents income generated after all costs except interest, taxes, and non-operating items. The operating margin reflects the relationship between sales and management-controlled costs (the cost of goods sold, as well as operating costs including selling, administrative and general expenses; research and development expenses; and depreciation). It does not consider how the firm is financed or non-business activities. Net profit margin is calculated by dividing net income by sales. It indicates how well management has been able to turn sales into earnings available for shareholders.

...To continue reading this article you must be registered with AAII.

Gain exclusive access to this article and all of the member benefits and investment education AAII offers.
JOIN TODAY for just $29.
Log in
Already registered with AAII? Login to read the rest of this article.

Register for FREE
to read this article and receive access to future AAII.com articles.
  
John Bajkowski is president of AAII.


Discussion

No comments have been added yet. Add your thoughts to the discussion!

You need to log in as a registered AAII user before commenting.
Create an account

Log In