There is a lot more to profitability than whether a company's bottom line is increasing. Profits can come from several sources, with some better than others. To get a deeper look into a company's profit trends, we performed DuPont analysis on the 30 stocks of the Dow Jones Industrial Average.
DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
We therefore focus on companies with the following positive characteristics: Increasing ROE along with,
- Decreasing leverage, i.e. decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the two stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
Do you think these companies have strong operations? Use this list as a starting point for your own analysis.
1. General Electric Company (GE): Operates as a technology, service, and finance company worldwide. Market cap at $216.65B, most recent closing price at $20.66. MRQ net profit margin at 9.6% vs. 9.12% y/y. MRQ sales/assets at 0.052 vs. 0.048 y/y. MRQ assets/equity at 5.703 vs. 5.927 y/y.
2. Unitedhealth Group, Inc. (UNH): Provides healthcare services in the United States. Market cap at $54.05B, most recent closing price at $52.91. MRQ net profit margin at 5.7% vs. 5.03% y/y. MRQ sales/assets at 0.381 vs. 0.357 y/y. MRQ assets/equity at 2.372 vs. 2.544 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.