These Stocks With High ROE Lead Their Industries In Profitability

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 |  Includes: COH, CTCM, FFIV, NFLX, TSM
by: Kapitall

Summary

Analyzing present performance and comparing it to how a company did in the past is one way investors can gain a better picture of a company's trajectory.

ROE shows investors the amount of profit (expressed in a percentage) that a company has generated from shareholder investment.

When firms have higher margins than their industry averages, it indicates that they are operating more efficiently than their peers.

When it comes to investing, context is everything. A company's $1 billion quarterly profit may seem great because a billion dollars is a lot of money.

But if the company in question made a $20 billion profit the year before, that figure would actually be quite disconcerting. Analyzing present performance and comparing it to how a company did in the past is one way investors can gain a better picture of a company's trajectory.

On a similar note, comparing a company's performance to its industry peers is also helpful when considering potential investments. For example, electric utility companies regularly have high capital expenditures-the money a firm spends on infrastructure and equipment-because they constantly need to upgrade their facilities to meet consumer demand and to satisfy government regulations. Netflix (NASDAQ:NFLX), meanwhile, doesn't have to spend that much money because it doesn't have a network to build or maintain.

There are several metrics that can help investors see how a stock stacks up against the competition. For our following screen, we decided to focus on profitability metrics. We began by screening for stocks with return on equity (ROE), return on assets (ROA), and return on investments (ROI) higher than the industry average on a trailing-twelve-month (TTM) basis.

ROE shows investors the amount of profit (expressed in a percentage) that a company has generated from shareholder investment. It's calculated by dividing net income (fiscal year profit minus dividends paid to preferred stock) by shareholder's equity, again excluding preferred shares.

ROA tells investors how successful a company is at using its assets-debt and equity-to generate earnings. A high ROA means that a company is adept at using these assets to make investments that earn a lot of money. ROA is calculated by dividing net income by total assets.

ROI analyzes the profitability of an investment by dividing the benefit of said investment by its cost. To calculate ROI, you take the difference between gain from investment (money earned from selling the investment) and cost of investment, and then divide by the cost of investment.

Then we screened for stocks that were more profitable than the industry average on the basis of three trailing-twelve-month profitability margins. The three we used were gross margin, which is the percent of revenue that remains after taking care of expenses; operating margin, which is the percent of revenue left after paying the costs involved with producing a good; and pretax margin, which is the company's earnings, including expenses, before taxes. When firms have higher margins than their industry averages, it indicates that they are operating more efficiently than their peers.

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We were left with four stocks on our list.

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1. Coach, Inc. (NYSE:COH): Engages in the design and marketing of accessories and gifts for men and women in the United States and internationally. Market cap at $9.28B, most recent closing price at $34.09.

TTM gross margin at 74.97% vs. industry average at 52.87%. TTM operating margin at 28.49% vs. industry average at 15.61%. TTM pretax margin at 27.38% vs. industry average at 14.52%.

TTM Return on Assets at 10.85% vs. an industry average at 5.62%. TTM Return on Equity at 38.61% vs. an industry average of 20.30%. TTM Return on Investments at 37.57% vs. an industry average at 18.28%.

2. CTC Media, Inc. (NASDAQ:CTCM): Operates as an independent broadcasting company in Russia. Market cap at $1.71B, most recent closing price at $10.93.

TTM gross margin at 54.84% vs. industry average at 40.89%. TTM operating margin at 29.59% vs. industry average at 19.75%. TTM pretax margin at 26.94% vs. industry average at 15.65%.

TTM Return on Assets at 16.69% vs. an industry average at 5.73%. TTM Return on Equity at 22.04% vs. an industry average of 0.54%. TTM Return on Investments at 21.36% vs. an industry average at 7.76%.

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3. F5 Networks, Inc. (NASDAQ:FFIV): Provides technology that optimizes the delivery of network-based applications, and the security, performance, and availability of servers, data storage devices, and other network resources in the Americas, EMEA, Japan, and the Asia Pacific. Market cap at $8.29B, most recent closing price at $109.46.

TTM gross margin at 85.02% vs. industry average at 59.59%. TTM operating margin at 28.39% vs. industry average at 20.43%. TTM pretax margin at 28.46% vs. industry average at 18.31%.

TTM Return on Assets at 12.88% vs. an industry average at 7.87%. TTM Return on Equity at 19.14% vs. an industry average of 12.26%. TTM Return on Investments at 19.09% vs. an industry average at 10.2%.

4. Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM): Engages in the computer-aided designing, manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices; and manufacturing masks. Market cap at $108.85B, most recent closing price at $20.78.

TTM gross margin at 71.44% vs. industry average at 58.72%. TTM operating margin at 35.62% vs. industry average at 19.72%. TTM pretax margin at 36.5% vs. industry average at 18.63%.

TTM Return on Assets at 15.65% vs. an industry average at 8.9%. TTM Return on Equity at 23.42% vs. an industry average of 10.20%. TTM Return on Investments at 18.39% vs. an industry average at 10.82%.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.