Return on equity is one of the most coveted metrics by investors. The metric enables investors to differentiate between a profit-churner and a profit-burner. It is a profitability ratio that measures the earnings a company generates from its equity.
To shortlist these gems, one can look at the DuPont technique to analyze basic ROE at an advanced level. 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
The screener yields winning stocks like Sanderson Farms , Global Industrial Company (
GIC Quick Quote GIC - Free Report) , Boise Cascade ( BCC Quick Quote BCC - Free Report) , LouisianaPacific ( LPX Quick Quote LPX - Free Report) and Skyline ( SKY Quick Quote SKY - Free Report) . Why Use DuPont?
Although one can’t play down the importance of normal ROE calculation, the fact remains that 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 the 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, the strength of a company can be misleading if it has a high debt load.
So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins over and spots the better stock.
Investors can simply do this analysis by taking a look at the company’s financials.However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.
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 the 11 stocks that made it through the screen: Sanderson Farms: The company is a poultry processing company that produces, processes, markets and distributes fresh and frozen chicken products. The stock carries a Zacks Rank #1. You can see . the complete list of today’s Zacks #1 Rank stocks here
The average earnings surprise of SAFM for the past four quarters is 60.49%.
Global Industrial Company: Zacks Rank #1 Global Industrial Company, through its operating subsidiaries, is a provider of industrial products principally in North America.
The average earnings surprise of GIC for the past four quarters is 36.33%.
Boise Cascade:This Zacks Rank #2 company operates as a wood products manufacturer and building materials distributor.
The average earnings surprise of BCC for the past four quarters is 38.18%.
LouisianaPacific: Zacks Rank #1 The company is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction.
The average earnings surprise of LPX for the past four quarters is 13.98%.
Skyline: Skyline Corporation designs, produces and distributes manufactured housing and recreational vehicles. It has a Zacks Rank #1.
The average earnings surprise of SKY for the past four quarters is 45.32%.
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