RReturn on equity is a preferred metric for investors when it comes to selecting quality stocks. But ROE doesn’t always tell the whole story, and an investor could be fooled into picking stocks based on that number. So going beyond basic ROE and analyzing it at an advanced level or applying DuPont’s technique sounds like an intriguing idea.
Here is how DuPont breaks down ROE into its various components:
ROE = Net Profit/Equity
Net Profit / Equity = (Net Profit / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = profit margin * asset turnover ratio * equity multiplier
Why use DuPont?
DuPont’s analysis allows investors to assess the elements that play a major role in any evolution of ROE. This can help investors separate companies with higher margins from those with high turnover. For example, high-end fashion brands typically survive with a high margin compared to retail products, which rely on higher revenue.
In fact, it also focuses on the debt status of the company. A high ROE could be due to overuse of debt. If so, a company’s strength may be uncertain if it has high debt.
Thus, an investor confined solely to an ROE perspective may be confused when judging between two stocks of equal ratio. This is where DuPont analysis takes over while uncovering the best stock.
Investors can simply do this analysis by looking at the company’s financial statements. However, reviewing each company’s financial statements 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.
• Profit margin greater than or equal to 3: As the name suggests, it is a measure of the company’s profitability. Generally, it is the main contributor to ROE.
• Asset turnover ratio greater than or equal to 2: It allows an investor to gauge the effectiveness of management in using assets to drive sales.
• Equity multiplier between 1 and 3: It is an indication of the amount of debt that the company uses to finance its assets.
• Zacks Rank less than or equal to 2: Stocks with a Zacks rank of #1 (strong buy) or 2 (buy) generally perform better than their peers in all types of market environments.
• Current price above $5: This filters out low-priced stocks. However, when looking for low-priced stocks, this criterion can be removed.
Here are five of the nine stocks that crossed the screen:
Medifast MED: This American nutrition and weight loss company currently has a Zacks Rank #2. Medifast produces, distributes and sells weight loss and health products through websites, multi-level marketing, telemarketing and franchised weight loss clinics. You can see the full list of today’s Zacks #1 Rank stocks here.
MED’s average earnings surprise for the last four quarters is 12.94%.
Sanderson SAFM Farms: Based in Mississippi, Sanderson Farms, Inc. is a poultry processing company that produces, processes, markets and distributes fresh and frozen chicken products. The stock carries a No. 1 Zacks rank.
SAFM’s average earnings surprise for the last four quarters is 60.49%.
Marine Max HZO: Zacks Rank #1 is the nation’s largest recreational boat and yacht retailer.
HZO’s average earnings surprise for the last four quarters is 32.75%.
CPG Global Industrial Company: Global Industrial Company, through its operating subsidiaries, is a supplier of industrial products primarily in North America. He has a #1 Zacks rank.
GIC’s average earnings surprise for the last four quarters is 36.33%.
BCC Boise Cascade: The company operates as a manufacturer of wood products and a distributor of building materials. He has a #2 Zacks rank.
BCC’s average earnings surprise for the last four quarters is 38.18%.
You can get the rest of the stocks on this list by signing up for your free 2-week trial to Research Assistant now and start using this screen in your own trading. Moreover, you can also create your own strategies and test them before diving into investing.
The research assistant is a great starting point. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your search assistant trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your findings, and see what gems come out.
Click here to sign up for a free trial of Research Assistant 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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
Zacks’ Top Picks for Leveraging Electric Vehicles
A lot of money has already been made in the electric vehicle (EV) industry. But the electric vehicle revolution has not yet reached full steam. There’s a lot of money to be made as the next push for future technologies gathers pace. Zacks special report reveals 5 top investors
See 5 EV stocks with extreme upside potential >>
Click to get this free report
Sanderson Farms, Inc. (SAFM): Free Stock Analysis Report
MarineMax, Inc. (HZO): Free Stock Analysis Report
Boise Cascade, LLC (BCC): Free Stock Analysis Report
Global Industrial Company (GIC): Free Inventory Analysis Report
MEDIFAST INC (MED): Free Stock Analysis Report
To read this article on Zacks.com, click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.