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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 small-cap stocks with market caps above 300 million.

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 (NYSEARCA:SPY) index over the last month.

(Click chart for more detail)

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

List sorted by change in ROE.

1. Resources Connection Inc. (NASDAQ:RECN): Provides professional services in provides finance, accounting, risk management and internal audit, corporate advisory, strategic communications and restructuring, information management, human capital, supply chain management, actuarial, and legal and regulatory services in support of client-led projects and initiatives. Market cap of $482.23M. MRQ Net Profit Margin increased to 1.88% from 0.99% year-over-year, Sales/Assets increased to 0.30 from 0.26, while Assets/Equity decreased to 1.26 from 1.33. The stock has lost 40.23% over the last year.

2. Douglas Dynamics, Inc. (NYSE:PLOW): Designs, manufactures, and sells snow and ice control equipment for light trucks in North America. Market cap of $333.38M. MRQ Net Profit Margin increased to 7.42% from 4.62% year-over-year, Sales/Assets increased to 0.14 from 0.12, while Assets/Equity decreased to 2.30 from 2.31. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 5.28%, current ratio at 2.75, and quick ratio at 2.12. The stock has gained 9.63% over the last year.

3. Stamps.com Inc. (NASDAQ:STMP): Provides Internet-based postage solutions. Market cap of $376.15M. MRQ Net Profit Margin increased to 18.18% from 13.19% year-over-year, Sales/Assets increased to 0.33 from 0.23, while Assets/Equity decreased to 1.19 from 1.26. After a solid performance over the last year, STMP has pulled back during recent sessions. The stock is 6.98% below its SMA20 and 3.74% below its SMA50, but remains 44.27% above its SMA200. The stock has performed poorly over the last month, losing 11.67%.

4. Zygo Corporation (NASDAQ:ZIGO): Designs, develops, and manufactures ultra-high precision measurement solutions to enhance its customers' manufacturing yields; and optical sub-systems and components for original equipment manufacturers and end-user applications in the United States and internationally. Market cap of $324.52M. MRQ Net Profit Margin increased to 14.71% from 8.77% year-over-year, Sales/Assets increased to 0.27 from 0.24, while Assets/Equity decreased to 1.23 from 1.25. Exhibiting strong upside momentum--currently trading 6.96% above its SMA20, 16.84% above its SMA50, and 30.25% above its SMA200. The stock has had a couple of great days, gaining 11.15% over the last week.

5. Susser Holdings Corporation (NYSE:SUSS): Operates convenience stores and distributes motor fuels in Texas, New Mexico, Oklahoma, and Louisiana. Market cap of $363.04M. MRQ Net Profit Margin increased to 1.37% from 0.93% year-over-year, Sales/Assets increased to 1.31 from 1.05, while Assets/Equity decreased to 4.07 from 4.29. After a solid performance over the last year, SUSS has pulled back during recent sessions. The stock is 9.46% below its SMA20 and 3.45% below its SMA50, but remains 21.08% above its SMA200. The stock has gained 47% over the last year.

6. Amerisafe, Inc. (NASDAQ:AMSF): Provides workers' compensation insurance focusing on small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging, oil and gas, maritime, sawmills, and agriculture in the United States and the U. Market cap of $428.98M. MRQ Net Profit Margin increased to 9.33% from 7.20% year-over-year, Sales/Assets increased to 0.06 from 0.05, while Assets/Equity decreased to 3.41 from 3.57. The stock has gained 28.46% over the last year.

7. Altra Holdings, Inc. (NASDAQ:AIMC): Designs, produces, and markets a range of mechanical power transmission and motion control products worldwide. Market cap of $496.25M. MRQ Net Profit Margin increased to 6.83% from 5.10% year-over-year, Sales/Assets increased to 0.28 from 0.26, while Assets/Equity decreased to 3.02 from 3.13. This is a risky stock that is significantly more volatile than the overall market (beta = 2.11). The stock is a short squeeze candidate, with a short float at 5.45% (equivalent to 6.18 days of average volume). The stock has had a good month, gaining 10.38%.

8. United States Lime & Minerals, Inc. (NASDAQ:USLM): Engages in the manufacture and sale of lime and limestone products in the United States. Market cap of $346.45M. MRQ Net Profit Margin increased to 18.02% from 14.28% year-over-year, Sales/Assets increased to 0.20 from 0.17, while Assets/Equity decreased to 1.43 from 1.49. The stock has gained 37.56% over the last year.

9. Lumber Liquidators Holdings, Inc. (NYSE:LL): Operates as a specialty retailer of hardwood flooring in the United States. Market cap of $481.36M. MRQ Net Profit Margin increased to 3.92% from 2.91% year-over-year, Sales/Assets increased to 0.65 from 0.63, while Assets/Equity decreased to 1.29 from 1.35. The stock is a short squeeze candidate, with a short float at 22.39% (equivalent to 12.12 days of average volume). The stock has lost 28.35% over the last year.

10. LeapFrog Enterprises Inc. (NYSE:LF): Provides technology-based learning platforms worldwide. Market cap of $389.71M. MRQ Net Profit Margin increased to 15.28% from 11.45% year-over-year, Sales/Assets increased to 0.50 from 0.44, while Assets/Equity decreased to 1.53 from 1.77. This is a risky stock that is significantly more volatile than the overall market (beta = 2.1). Exhibiting strong upside momentum--currently trading 14.5% above its SMA20, 36.14% above its SMA50, and 42.33% above its SMA200. The stock has had a couple of great days, gaining 8.82% over the last week.

11. The Marcus Corporation (NYSE:MCS): Operates theatres, and hotels and resorts. Market cap of $362.87M. MRQ Net Profit Margin increased to 10.07% from 8.79% year-over-year, Sales/Assets increased to 0.18 from 0.16, while Assets/Equity decreased to 1.98 from 2.04. The stock has lost 9.22% over the last year.

12. DXP Enterprises, Inc. (NASDAQ:DXPE): Distributes maintenance, repair, and operating products (mro), equipment, and services to industrial customers in the U. Market cap of $425.68M. MRQ Net Profit Margin increased to 3.98% from 3.10% year-over-year, Sales/Assets increased to 0.61 from 0.56, while Assets/Equity decreased to 2.33 from 2.69. Exhibiting strong upside momentum--currently trading 6.25% above its SMA20, 22.74% above its SMA50, and 25.76% above its SMA200. The stock has had a good month, gaining 15.54%.

13. Assisted Living Concepts Inc. (NYSE:ALC): Operates senior living residences in the United States. Market cap of $335.01M. MRQ Net Profit Margin increased to 9.84% from 7.81% year-over-year, Sales/Assets increased to 0.13 from 0.12, while Assets/Equity decreased to 1.54 from 1.69. The stock has had a couple of great days, gaining 6.33% over the last week.

14. Standard Motor Products Inc. (NYSE:SMP): Distributes replacement parts for motor vehicles in the automotive aftermarket industry primarily in the United States, Canada, and Latin America. Market cap of $456.90M. MRQ Net Profit Margin increased to 5.52% from 4.25% year-over-year, Sales/Assets increased to 0.45 from 0.41, while Assets/Equity decreased to 2.16 from 2.66. This is a risky stock that is significantly more volatile than the overall market (beta = 2.24). Exhibiting strong upside momentum--currently trading 8.1% above its SMA20, 21.16% above its SMA50, and 42.26% above its SMA200. The stock has had a good month, gaining 10.75%.

15. Bio-Reference Laboratories Inc. (NASDAQ:BRLI): Provides clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area. Market cap of $348.26M. MRQ Net Profit Margin increased to 6.81% from 6.58% year-over-year, Sales/Assets increased to 0.53 from 0.52, while Assets/Equity decreased to 1.56 from 1.63. The stock is a short squeeze candidate, with a short float at 27.38% (equivalent to 14.24 days of average volume). The stock has performed poorly over the last month, losing 22.12%.

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

Source: 15 Small-Cap Stocks With Strong Sources Of Profitability