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There is always more to a company’s story than its bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways – some more preferred than others. This is why it is always a good idea to study the sources of profits for a company. 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:

  1. Decreasing leverage, i.e. decreasing Asset/Equity ratio
  2. 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 stocks from the tech sector that are rallying above their 20-day, 50-day, and 200-day moving averages.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the six 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 companies have impressive profitability? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Maxim Integrated Products Inc. (NASDAQ:MXIM): Designs, develops, manufactures, and markets a range of linear and mixed-signal integrated circuits worldwide. Market cap of $7.20B. The stock is currently trading at 10.99% above its 20-Day SMA, 9.77% above its 50-Day SMA, and 2.24% above its 200-Day SMA. MRQ Net Profit Margin increased to 20.05% from 10.33% year-over-year, Sales/Assets increased to 0.18 from 0.16, while Assets/Equity decreased to 1.41 from 1.48. The stock has had a couple of great days, gaining 9.65% over the last week.

2. Windstream Corporation (NASDAQ:WIN): Provides communications and technology solutions in the United States. Market cap of $6.46B. The stock is currently trading at 3.65% above its 20-Day SMA, 3.32% above its 50-Day SMA, and 0.96% above its 200-Day SMA. MRQ Net Profit Margin increased to 9.05% from 8.61% year-over-year, Sales/Assets increased to 0.0910 from 0.0909, while Assets/Equity decreased to 14.15 from 15.72. The stock has gained 10.76% over the last year.

3. Ansys, Inc. (NASDAQ:ANSS): Engages in the development and marketing of engineering simulation software and services used by engineers and designers in aerospace, automotive, manufacturing, electronics, biomedical, energy, and defense industries. Market cap of $4.75B. The stock is currently trading at 5.58% above its 20-Day SMA, 3.26% above its 50-Day SMA, and 0.01% above its 200-Day SMA. MRQ Net Profit Margin increased to 28.0% from 25.76% year-over-year, Sales/Assets increased to 0.0725 from 0.0705, while Assets/Equity decreased to 1.36 from 1.39. The stock has gained 23.13% over the last year.

4. ValueClick, Inc. (VCLK): Provides performance-based online advertising campaigns and programs primarily in the United States and the United Kingdom. Market cap of $1.24B. The stock is currently trading at 9.23% above its 20-Day SMA, 0.40% above its 50-Day SMA, and 1.71% above its 200-Day SMA. MRQ Net Profit Margin increased to 13.58% from 12.09% year-over-year, Sales/Assets increased to 0.20 from 0.18, while Assets/Equity decreased to 1.29 from 1.37. The stock is a short-squeeze candidate, with a short float at 10.08% (equivalent to 6.36 days of average volume). The stock has gained 31% over the last year.

5. Omnicell Inc. (NASDAQ:OMCL): Offers automated solutions for hospital medication dispensing and supply management primarily in the United States and Canada. Market cap of $516.83M. The stock is currently trading at 7.84% above its 20-Day SMA, 3.26% above its 50-Day SMA, and 9.05% above its 200-Day SMA. MRQ Net Profit Margin increased to 4.25% from 3.60% year-over-year, Sales/Assets increased to 0.17 from 0.16, while Assets/Equity decreased to 1.29 from 1.30. The stock has had a couple of great days, gaining 8.48% over the last week.

6. Renaissance Learning Inc. (NASDAQ:RLRN): Provides computer-based assessment and periodic progress monitoring technology for pre-kindergarten through senior high schools and districts in the United States and internationally. Market cap of $455.67M. The stock is currently trading at 2.11% above its 20-Day SMA, 13.42% above its 50-Day SMA, and 30.68% above its 200-Day SMA. MRQ Net Profit Margin increased to 14.87% from 13.85% year-over-year, Sales/Assets increased to 0.63 from 0.36, while Assets/Equity decreased to -2.03 from 6.07. The stock has had a good month, gaining 34.02%.

Accounting data sourced from Google Finance; all other data sourced from Finviz.

Source: 6 Rallying Tech Stocks With Strong Profit Sources