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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 ...

  • 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 a universe of about 80 stocks involved in the clean energy industry.

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.

Click to enlarge

Do you think these companies have healthy profitability? Use this list as a starting point for your own analysis.

List sorted by change in ROE.

1. General Electric Co. (GE): Operates as a technology, service and finance company worldwide. Market cap of $173.74B. MRQ Net Profit Margin increased to 9.12% from 5.81% year-over-year, Sales/Assets increased to 0.0479 from 0.0466, while Assets/Equity decreased to 5.93 from 6.57. The stock has gained 1.17% over the last year.

2. NextEra Energy, Inc. (NEE): Engages in the generation, transmission, distribution and sale of electric energy in the United States and Canada. Market cap of $23.82B. MRQ Net Profit Margin increased to 14.64% from 11.61% year-over-year, Sales/Assets increased to 0.0726 from 0.0701, while Assets/Equity decreased to 3.66 from 3.79. The stock has gained 7.28% over the last year.

3. Cabot Corp. (CBT): Provides specialty chemicals and performance materials worldwide. Market cap of $1.99B. MRQ Net Profit Margin increased to 5.89% from 5.0% year-over-year, Sales/Assets increased to 0.26 from 0.24, while Assets/Equity decreased to 2.12 from 2.22. The stock has recently rebounded, and is currently trading 10.32% above its SMA20 and 6.42% above its SMA50. However, the stock still trades 18.36% below its SMA200. The stock has had a good month, gaining 19.83%.

4. IXYS Corp. (IXYS): Engages in the development, manufacture and marketing of power semiconductors, advanced mixed signal integrated circuits (ICs), application specific integrated circuits (ASICs), and systems and radio frequency semiconductors. Market cap of $434.13M. MRQ Net Profit Margin increased to 9.81% from 7.69% year-over-year, Sales/Assets increased to 0.3013 from 0.2977, while Assets/Equity decreased to 1.40 from 1.55. The stock is a short squeeze candidate, with a short float at 5.01% (equivalent to 8.61 days of average volume). The stock has had a good month, gaining 25.09%.

5. MGE Energy Inc. (MGEE): Operates as a public utility holding company. Market cap of $1.0B. MRQ Net Profit Margin increased to 10.85% from 10.59% year-over-year, Sales/Assets increased to 0.0881 from 0.0854, while Assets/Equity decreased to 2.47 from 2.50. The stock has gained 7.79% over the last year.

6. Donaldson Company, Inc. (DCI): Engages in the manufacture and sale of filtration systems and replacement parts worldwide. Market cap of $4.97B. MRQ Net Profit Margin increased to 10.52% from 9.93% year-over-year, Sales/Assets increased to 0.36 from 0.34, while Assets/Equity decreased to 1.85 from 2.01. The stock has had a good month, gaining 16.79%.

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

Source: 6 Clean Energy Stocks With Strong Sources Of Profitability