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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)
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.
However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can easily shortlist the stocks that look impressive with a 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 13 stocks that made it through the screen:
Nutrisystem Inc. (NASDAQ:– Free Report): This Zacks Rank #1 company is a provider of weight management products and services. It belongs to a Zacks Industry Rank is in the top 20%.
NVR Inc. (NYSE:(NVR - Free Report) – Free Report): The Zacks Rank #1 holding company operates in two business segments: construction and marketing of homes, and in financial services. It belongs to a Zacks Industry Rank in the top 12%.
Ross Stores Inc. (NASDAQ:(ROST - Free Report) – Free Report): This operator of a chain of off-price retail apparel and home accessories stores carries a Zacks Rank #2. The Zacks Industry Rank for the stock is in the top 26%.
Best Buy Co. Inc. (NYSE:(BBY - Free Report) – Free Report): The Zacks Rank #2 company operates in a single business segment, selling personal computers and other home office products and related accessories principally through its retail stores. The Zacks Industry Rank is in the top 5%.
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.
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here https://at.zacks.com/?id=112
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time!Click here for your free subscription to Profit from the Pros.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks.com featured highlights: Sanderson Farms, Nutrisystem, NVR, Ross Stores and Best Buy
For Immediate Release
Chicago, IL –August 22, 2017 - Stocks in this week’s article includeSanderson Farms Inc. (NASDAQ:– Free Report), Nutrisystem Inc. (NASDAQ:– Free Report), NVR Inc. (NYSE:(NVR - Free Report) – Free Report), Ross Stores Inc. (NASDAQ:(ROST - Free Report) – Free Report) andBest Buy Co. Inc. (NYSE:(BBY - Free Report) – Free Report).
5 Stock Picks from 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.
However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can easily shortlist the stocks that look impressive with a 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 13 stocks that made it through the screen:
Sanderson Farms Inc. (NASDAQ: – Free Report): This is Zacks Rank #2 company engaged in poultry processing. It belongs to a Zacks Industry Rank in the top 5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nutrisystem Inc. (NASDAQ: – Free Report): This Zacks Rank #1 company is a provider of weight management products and services. It belongs to a Zacks Industry Rank is in the top 20%.
NVR Inc. (NYSE:(NVR - Free Report) – Free Report): The Zacks Rank #1 holding company operates in two business segments: construction and marketing of homes, and in financial services. It belongs to a Zacks Industry Rank in the top 12%.
Ross Stores Inc. (NASDAQ:(ROST - Free Report) – Free Report): This operator of a chain of off-price retail apparel and home accessories stores carries a Zacks Rank #2. The Zacks Industry Rank for the stock is in the top 26%.
Best Buy Co. Inc. (NYSE:(BBY - Free Report) – Free Report): The Zacks Rank #2 company operates in a single business segment, selling personal computers and other home office products and related accessories principally through its retail stores. The Zacks Industry Rank is in the top 5%.
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.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here https://at.zacks.com/?id=112
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time!Click here for your free subscription to Profit from the Pros.
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.