CHICAGO, Sept. 21, 2011 /PRNewswire/ -- Stocks in this week's article include: Crocs, Inc. (NASDAQ: CROX), Domino's Pizza, Inc. (NYSE: DPZ), IAC/InterActiveCorp (NASDAQ: IACI), Lululemon Athletica Inc. (NASDAQ: LULU) and Select Comfort Corporation (NASDAQ: SCSS). Kevin Matras looks at Sales Growth and Increasing Profit Margins; a powerful combination for big returns.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
This week I want to focus on Sales Growth and Profit Margins. While everybody understands sales, margins might bring up a few question marks. And with earnings season only about three weeks away (it officially kicks off on Oct. 11th with Alcoa), now is the perfect time to look at this.
So let's start at the beginning: first and foremost, sales are THE most important thing to a company. Everything else stems from that. Without sales, there really wouldn't be anything else to analyze. And Sales Growth numbers show you how that company is growing.
However, just because sales are increasing, doesn't always mean that profits are increasing too. Sales at the expense of profits does not work. So paying attention to Profit Margins is the next thing we're going to want to look at.
Margin is simply a ratio and the calculation is: Net Income divided by Sales
So if a company's margin is 15% for instance, that means its net income is 15 cents for every $1 dollar of sales it makes. But if a company's expenses are growing faster than sales, this will reduce its margins.
In general, a company with increasing margins is becoming more profitable and is better managed, i.e., its costs are under control.
So this earnings season, dig deeper into the numbers. Yes, look at their sales. And of course, look at their earnings. But take a look at their profit margins as well. Are they going up or down? In other words, are they making more on each dollar of sales they make, or less? This is important stuff to know, and could make the difference between investors buying a company's earnings announcement, or selling it.
Parameters for this week's screen are…
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