For Immediate Release
Chicago, IL – January 15, 2020 – Stocks in this week’s article are Calavo Growers Inc. (CVGW - Free Report) , BMC Stock Holdings Inc. (BMCH - Free Report) , Humana Inc. (HUM - Free Report) , Vipshop Holdings Ltd. (VIPS - Free Report) and AllianceBernstein Holding L.P. (AB - Free Report) .
5 Top-Ranked Dupont-Confirmed Quality Stocks
Wall Street is at lofty levels with stupendous equity gains in 2019. Naturally, fears of a correction are understandable. Since market watchers are still predicting decent gains in equities in 2020, it would be wise to bet on quality stocks right now.
Return on equity (ROE) is one of the most-favored quality metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare this to historical or industry benchmarks to pick a winning stock.
However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play. It is an analytical method, which examines three major elements, namely operating management, management of assets and capital structure to find out the financial condition of a company. Below we show 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
Why Use DuPont?
Although one cannot brush off the importance of normal ROE calculation, the fact remains that it doesn’t always portray 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 with higher margins from those having a high turnover. For example, high-end fashion brands generally survive on high margins compared with retail goods, which rely on a higher turnover.
And one of the ROE components – equity multiplier (explained below) – can help you judge how burdened a company is with debts. 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 a 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 stocks that look impressive with a DuPont analysis.
For the rest of this Screen of the Week article please visit Zacks.com at:https://www.zacks.com/stock/news/716990/5-top-ranked-dupont-confirmed-quality-stocks
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