Stock selection based on fundamentals can sometimes be a demanding task, given the extensive research it may involve.
Generally, investors prefer companies that post good profit margins consistently as they point out how well a company can maximize its revenues and/or control its costs relative to peers.
However, a company with low profit margin isn’t necessarily an unattractive investment proposition since various other reasons influence financial performance and stock price. Moreover, past results may not be a leading indicator of future prospects.
Through a study, it has been said that across 13 companies from the BSE universe which reported net profit margins in excess of 20 percent in each of the last three financial years (FY15, FY16, and FY17).
Not surprisingly, investors also earned good returns on most of these stocks. Barring three (TCS, Infosys and GE Shipping), each beat the Sensex.
The best performers – Deep Industries, JM Financial, and Ajanta Pharma – notched up 588 percent, 361 percent, and 334 percent absolute return, respectively, over a three-year time horizon.
There are also companies (Bajaj Corp, Indiabulls Housing Finance, and Infosys) that not only delivered steady results but also paid out a minimum of 40 percent of their annual profit as dividend each year.