Seeking Alpha
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message|
( followers)  

Company profitability is not as straightforward as it often appears to be. Although net income is the popular headline number that analysts follow during earnings season, companies can earn these profits in different ways, with some preferred over others. This is why it is important to also 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 the 200 largest companies by market cap.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top 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 point for your own analysis.

List sorted by change in ROE.

1. Chevron Corporation (NYSE:CVX): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $207.83B. MRQ Net Profit Margin increased to 12.15% from 7.58% year-over-year, Sales/Assets increased to 0.32 from 0.28, while Assets/Equity decreased to 1.69 from 1.73. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.1%, current ratio at 1.64, and quick ratio at 1.45. The stock has had a couple of great days, gaining 7.16% over the last week.

2. Las Vegas Sands Corp. (NYSE:LVS): Develops, and operates various integrated resort properties primarily in the United States, Macau, and Singapore. Market cap of $31.21B. MRQ Net Profit Margin increased to 17.63% from 11.24% year-over-year, Sales/Assets increased to 0.11 from 0.09, while Assets/Equity decreased to 2.68 from 3.07. The stock has lost 4.22% over the last year.

3. General Electric Company (NYSE:GE): Operates as a technology, service, and finance company worldwide. Market cap of $176.52B. 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 had a couple of great days, gaining 12.06% over the last week.

4. The Dow Chemical Company (NYSE:DOW): Manufactures and supplies products used as raw materials in the production of customer products and services worldwide. Market cap of $33.15B. MRQ Net Profit Margin increased to 5.96% from 4.64% year-over-year, Sales/Assets increased to 0.23 from 0.19, while Assets/Equity decreased to 2.77 from 3.01. This is a risky stock that is significantly more volatile than the overall market (beta = 2.32). The stock has had a couple of great days, gaining 8.93% over the last week.

5. Honeywell International Inc. (NYSE:HON): Operates as a diversified technology and manufacturing company worldwide. Market cap of $42.23B. MRQ Net Profit Margin increased to 9.27% from 7.35% year-over-year, Sales/Assets increased to 0.24 from 0.21, while Assets/Equity decreased to 3.38 from 3.69. The stock has had a couple of great days, gaining 5.9% over the last week.

6. National Oilwell Varco, Inc. (NYSE:NOV): Designs, constructs, manufactures, and sells systems, components, and products used in oil and gas drilling and production; provides oilfield services and supplies; and distributes products, and provides supply chain integration services to the upstream oil and gas industry worldwide. Market cap of $30.98B. MRQ Net Profit Margin increased to 14.22% from 13.42% year-over-year, Sales/Assets increased to 0.15 from 0.14, while Assets/Equity decreased to 1.43 from 1.45. The stock has had a couple of great days, gaining 8.25% over the last week.

7. Kraft Foods Inc. (KFT): Manufactures and markets packaged food products worldwide. Market cap of $64.50B. MRQ Net Profit Margin increased to 6.97% from 6.36% year-over-year, Sales/Assets increased to 0.14 from 0.13, while Assets/Equity decreased to 2.62 from 2.68. The stock has gained 23.43% over the last year.

8. Mastercard Incorporated (NYSE:MA): Provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers' cheque programs. Market cap of $47.13B. MRQ Net Profit Margin increased to 39.44% from 36.27% year-over-year, Sales/Assets increased to 0.19 from 0.17, while Assets/Equity decreased to 1.62 from 1.69. The stock has gained 50.79% over the last year.

9. Union Pacific Corporation (NYSE:UNP): Provides rail transportation services in North America. Market cap of $49.68B. MRQ Net Profit Margin increased to 17.72% from 17.65% year-over-year, Sales/Assets increased to 0.11 from 0.10, while Assets/Equity decreased to 2.43 from 2.47. The stock has gained 11.5% over the last year.

10. Visa, Inc. (NYSE:V): Operates retail electronic payments network worldwide. Market cap of $77.53B. MRQ Net Profit Margin increased to 36.93% from 36.56% year-over-year, Sales/Assets increased to 0.07 from 0.06, while Assets/Equity decreased to 1.31 from 1.34. The stock has gained 25.04% over the last year.

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

Source: 10 Mega-Cap Stocks With Strong Sources Of Profitability