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A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.

ROE can be broken up into three components such that increases in ROE can be attributed to those components.


= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

Analyzing the sources of returns for a company, we can focus on companies with the following 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 passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

To illustrate this analysis, we ran DuPont on companies with low beta (indicating less volatility than the overall market) that also are paying dividend yields above 1% (with sustainable payout ratios below 35%).

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.

(Click to enlarge)

Do you think these companies have attractive operations? Use this list as a starting-off point for your own analysis.

1. Coca-Cola Bottling Co. Consolidated (NASDAQ:COKE): Beverages Industry. Market cap of $611.18M. Beta at 0.48. Dividend yield at 1.51%, payout ratio at 24.62%. MRQ net profit margin has increased to 1.64% from 1.34% one year ago, MRQ Sales/Assets has increased to 0.27 from 0.26, and MRQ Assets/Equity has decreased to 9.99 from 11.02. The stock has had a couple of great days, gaining 5.67% over the last week.

2. National Healthcare Corp. (NYSEMKT:NHC): Long-Term Care Facilities Industry. Market cap of $564.26M. Beta at 0.39. Dividend yield at 2.94%, payout ratio at 29.31%. MRQ net profit margin has increased to 9.70% from 6.05% one year ago, MRQ Sales/Assets has increased to 0.23 from 0.22, and MRQ Assets/Equity has decreased to 1.44 from 1.48. The stock is currently stuck in a downtrend, trading 18.69% below its SMA20, 18.14% below its SMA50, and 13.27% below its SMA200. It's been a rough couple of days for the stock, losing 13.52% over the last week.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.