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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.

ROE
= (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.

To illustrate this analysis, we ran DuPont on companies in the tech sector that are currently trading within 10% of their 52-week lows.

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.


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.



Do you think these stocks are set to rebound? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Motorola Solutions, Inc. (NYSE:MSI): Communication Equipment Industry. Market cap of $13.53B. The stock is trading 8.0% above its 52-week low. MRQ net profit margin has increased to 16.98% from 8.37% on year ago, MRQ Sales/Assets has increased to 0.13 from 0.08, and MRQ Assets/Equity has decreased to 2.31 from 2.45. It's been a rough couple of days for the stock, losing 10.24% over the last week.

2. CA Technologies (NASDAQ:CA): Application Software Industry. Market cap of $9.75B. The stock is trading 9.76% above its 52-week low. MRQ net profit margin has increased to 20.72% from 20.30% on year ago, MRQ Sales/Assets has increased to 0.10 from 0.09, and MRQ Assets/Equity has decreased to 2.07 from 2.21. It's been a rough couple of days for the stock, losing 11.62% over the last week.

3. Broadridge Financial Solutions Inc. (NYSE:BR): Information & Delivery Services Industry. Market cap of $2.48B. The stock is trading 5.11% above its 52-week low. MRQ net profit margin has increased to 5.63% from 5.07% on year ago, MRQ Sales/Assets has increased to 0.28 from 0.17, and MRQ Assets/Equity has decreased to 2.68 from 3.34. It's been a rough couple of days for the stock, losing 12.88% over the last week.

4. Convergys Corporation (NYSE:CVG): Business Software & Services Industry. Market cap of $1.26B. The stock is trading 9.34% above its 52-week low. MRQ net profit margin has increased to 5.75% from 5.19% on year ago, MRQ Sales/Assets has increased to 0.26 from 0.24, and MRQ Assets/Equity has decreased to 1.73 from 1.75. The stock is a short squeeze candidate, with a short float at 6.56% (equivalent to 9.22 days of average volume). It's been a rough couple of days for the stock, losing 13.25% 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.

Source: 4 Tech Stocks Trading Near Lows With Strong Sources of Profitability