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Pick 5 Top-Ranked Profitable Stocks Using DuPont Analysis
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Return on equity (ROE) is one of the top ratios that investors use to screen profitable stocks. However, delving into the basic ROE and analyzing it at a deeper level, with the help of DuPont analysis, could lead to better returns.
It is an analytical method, which critically examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. It’s basically taking ROE apart to examine how it works. Although it can be presented in several ways, the most popular one is shown below:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
The importance of ROE can’t be denied but still it doesn’t always provide a complete picture.The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.
In fact, it also sheds light on a company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, ROE of a company can be misleading if it has a high debt burden.
So, an investor confined solely to an ROE perspective will be at a loss if he or she has to judge between two stocks of equal ratio. DuPont analysis comes to the rescue and finds out the better stock. Thus, a company with a healthy mix of all the three metrics – profit margin, asset turnover ratio and equity multiplier – will be the most alluring.
DuPont analysis is not difficult, as the required numbers are available in a company’s income statement and balance sheet.
However, looking at the financial statements of each and every company separately can be a tedious task. Screening tools like Zacks Research Wizard can easily shortlist the stocks that look impressive based on DuPont analysis.
Screening Parameters
• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.
• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.
• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.
• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.
• Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.
Here are five of 12 stocks that made it through the screen:
American Woodmark Corporation (AMWD - Free Report) : The Zacks Rank #2 company manufactures and distributes kitchen cabinets and vanities for remodeling. Its Zacks Industry Rank is in the top 31%.
Five Below Inc. (FIVE - Free Report) : It is a specialty value retailer offering merchandise for teen and pre-teen customers in the U.S. Its Zacks Industry Rank is in the top 31%. The stock has a Zacks Rank #2.
Best Buy Co. Inc. (BBY - Free Report) : The company is a leading retailer. The stock carries a Zacks Rank #1 and has a VGM score of A. Its Zacks Industry Rank is in the top 1%.
PetMed Express Inc. (PETS - Free Report) : This is the largest pet pharmacy, delivering prescription and non-prescription pet medications. It has a Zacks Rank #1 and the Zacks Industry Rank is in the top 15%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Pick 5 Top-Ranked Profitable Stocks Using DuPont Analysis
Return on equity (ROE) is one of the top ratios that investors use to screen profitable stocks. However, delving into the basic ROE and analyzing it at a deeper level, with the help of DuPont analysis, could lead to better returns.
It is an analytical method, which critically examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. It’s basically taking ROE apart to examine how it works. Although it can be presented in several ways, the most popular one is shown below:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier
Why Use DuPont?
The importance of ROE can’t be denied but still it doesn’t always provide a complete picture.The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.
In fact, it also sheds light on a company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, ROE of a company can be misleading if it has a high debt burden.
So, an investor confined solely to an ROE perspective will be at a loss if he or she has to judge between two stocks of equal ratio. DuPont analysis comes to the rescue and finds out the better stock. Thus, a company with a healthy mix of all the three metrics – profit margin, asset turnover ratio and equity multiplier – will be the most alluring.
DuPont analysis is not difficult, as the required numbers are available in a company’s income statement and balance sheet.
However, looking at the financial statements of each and every company separately can be a tedious task. Screening tools like Zacks Research Wizard can easily shortlist the stocks that look impressive based on DuPont analysis.
Screening Parameters
• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.
• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.
• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.
• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.
• Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.
Here are five of 12 stocks that made it through the screen:
Nutrisystem Inc. : This Zacks Rank #1 company is a provider of weight management products and services. Its Zacks Industry Rank is in the top 13%. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Woodmark Corporation (AMWD - Free Report) : The Zacks Rank #2 company manufactures and distributes kitchen cabinets and vanities for remodeling. Its Zacks Industry Rank is in the top 31%.
Five Below Inc. (FIVE - Free Report) : It is a specialty value retailer offering merchandise for teen and pre-teen customers in the U.S. Its Zacks Industry Rank is in the top 31%. The stock has a Zacks Rank #2.
Best Buy Co. Inc. (BBY - Free Report) : The company is a leading retailer. The stock carries a Zacks Rank #1 and has a VGM score of A. Its Zacks Industry Rank is in the top 1%.
PetMed Express Inc. (PETS - Free Report) : This is the largest pet pharmacy, delivering prescription and non-prescription pet medications. It has a Zacks Rank #1 and the Zacks Industry Rank is in the top 15%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »