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Tuesday, 16 February 2010

Low Net Profit Margin - Avoid Them?

Some retail investors hope to find good companies which are cash rich, high dividends payout, high net profit margin and high growth companies. Such thinking is no different from some young women dreaming of finding young husbands who are cash rich, no vices, high income earners, and have bright future.

What will be your advices to these women?

Is Your Company Hoarding Too Much Cash For You? - Part 4

Highly Leveraged Blue Chips - Avoiding Them Like Plague?

Should you also avoid companies with low net profit margin like shit?

You should look closely at the nature of business before advising people to totally avoid companies that operates on low margin as you may potentially miss your chances of taking some nice profit off the table.

For example, in 2009, the top five best performing STI component stocks are as follows:

1) Noble Group, +218.6%
2) Genting Singapore, +201.9%
3) Jardine C&C, +184.2%
4) Golden Agri, + 145.7%
5) Olam Intl, +131.3%

Noble and Olam are both low net profit margin companies but if you are early investors you are laughing to the banks.

It is not necessary that a company must have a high net profit margin; in fact, in some industries it is better not to. For example like grocery stores, it is important to move a massive amount of volume. To do this, the grocery stores must reduce their profit margins to as low as possible.

Keep in mind that a high net profit margin does not correlate to large profits. If the company cannot move their product in large quantity, it does not matter what the net profit margin is, they are not going to make lots of money. Basically, the net profit margin is telling us how much markup, after all costs and expenses, there is in the companies business model.

It is perfectly acceptable to have a low profit margin with a very fast inventory turnover and massive amount of volume and that may translate to huge profits.

What is your advice again to those women who are still waiting for their dream men?

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