Net Profit Margin Filter: The Bottom Line for Stock Screeners
What net profit margin measures, how it differs from gross margin, and how to use the net margin filter to find genuinely profitable companies for the wheel strategy.
What is net profit margin?
Net Margin = Net Income ÷ Revenue × 100
Net margin is the percentage of revenue left over after every expense — cost of goods, operating expenses, interest, and taxes. A company with a 15% net margin keeps $0.15 of every dollar of revenue as profit.
Unlike gross margin, net margin is the final word on whether a business is actually profitable.
Net margin vs gross margin
| Metric | What's deducted | Use case |
|---|---|---|
| Gross margin | Direct production costs only | Is the core product profitable? |
| Net margin | All costs including SG&A, R&D, interest, tax | Is the whole business profitable? |
A company can have a 70% gross margin but a 2% net margin if it spends heavily on R&D or carries a lot of debt interest. Both filters together tell the full story.
Recommended minimum ranges
| Company type | Net margin target |
|---|---|
| Large-cap established | ≥ 10% |
| Mid-cap quality | ≥ 8% |
| High-growth reinvesting | ≥ 5% (but watch trajectory) |
| Avoid | < 0% (loss-making) |
Using the filter
- Open the Stock Screener.
- Find Net % in the Profitability section.
- Set minimum to 8% as a starting point.
- Combine with Gross Margin ≥ 30% and Market Cap ≥ 2B.
5-year net margin: the stability check
The screener also includes 5Y Net % (five-year average). Use this to distinguish a company with a one-year spike in margins from one with a consistent track record. Consistent margins mean consistent earnings — and more predictable option behaviour.
Common mistakes
1. Mixing sectors. A 5% net margin is excellent for a grocery chain, barely acceptable for a tech company. Context matters.
2. Ignoring interest charges. A company with 20% operating margin but 18% interest expense has a paper-thin 2% net margin and is one rate hike away from losses. Check Debt/Equity alongside Net Margin.
Frequently Asked Questions
Should I avoid stocks with a net margin below 5%?
Not necessarily. Retailers and wholesalers routinely operate with 2–4% net margins and can still be excellent wheel strategy stocks. The key is whether the margin is stable or improving and whether the business has low debt. Use D/E and 5Y Net % to round out the picture.