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Image: Bigstock featured highlights include: Medifast, 1800 FLOWERS.COM, USANA Health Sciences, UFP Industries and AllianceBernstein

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For Immediate Release

Chicago, IL – March 23, 2021 – Stocks in this week’s article are Medifast, Inc. (MED - Free Report) , 1800 FLOWERS.COM, Inc. (FLWS - Free Report) , USANA Health Sciences, Inc. (USNA - Free Report) , UFP Industries, Inc. (UFPI - Free Report) and AllianceBernstein Holding L.P. (AB - Free Report) .

5 Best Stocks to Buy After Analyzing ROE the DuPont Way

Return on equity (ROE) is one of the most coveted metrics among investors in search of profit-generating stocks. Delving into the basic ROE, with the help of DuPont analysis, before shortlisting stocks could lead to even better returns. It's basically taking ROE apart to examine how it works. Here is how DuPont breaks down ROE into its different components:

ROE = Net Income/Equity

Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)

ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier

Inside DuPont's Effectiveness

Although one can't stress the importance of ROE enough, the fact remains that it doesn't always provide a complete picture. But the DuPont analysis allows investors to assess which of the elements is dominant in any change in ROE. It can help investors to segregate companies having high 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 looking at two stocks only from an ROE perspective will be impartial if the values are the same. However, DuPont analysis will help to differentiate between the two stocks and find the better one. Thus, a company with a healthy mix of all the three ratios – profit margin, asset turnover ratio and equity multiplier – will be the most alluring.

DuPont analysis is not very difficult, as the required numbers are available in the company income statement and balance sheet of a company.

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