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There is a lot more to profitability than whether a company’s bottom line is increasing. Profits can come from several sources, with some better than others. To get a deeper look into a company’s profit trends, we performed DuPont analysis on the 30 stocks of the Dow Jones Industrial Average.

DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:

ROE

= (Net Profit/Equity)

= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)

= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

We therefore focus on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

‪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 strong operations? Use this list as a starting point for your own analysis.

List sorted by increase in ROE.

1. Merck & Co. Inc. (NYSE:MRK): Provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Market cap of $108.38B. MRQ Net Profit Margin increased to 14.07% from 3.07% year-over-year, Sales/Assets increased to 0.11 from 0.10, while Assets/Equity decreased to 1.93 from 1.94. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 4.72%, current ratio at 2.06, and quick ratio at 1.68. The stock has gained 1.6% over the last year.

2. Pfizer Inc. (NYSE:PFE): A biopharmaceutical company, offers prescription medicines for humans and animals worldwide. Market cap of $160.35B. MRQ Net Profit Margin increased to 21.74% from 5.41% year-over-year, Sales/Assets increased to 0.09 from 0.08, while Assets/Equity decreased to 2.1781 from 2.1842. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.84%, current ratio at 2.25, and quick ratio at 1.95. The stock has gained 27.27% over the last year.

3. Alcoa, Inc. (NYSE:AA): Engages in the production and management of aluminum, fabricated aluminum, and alumina. Market cap of $9.51B. MRQ Net Profit Margin increased to 2.68% from 1.15% year-over-year, Sales/Assets increased to 0.16 from 0.14, while Assets/Equity decreased to 2.65 from 2.87. This is a risky stock that is significantly more volatile than the overall market (beta = 2.09). It's been a rough couple of days for the stock, losing 9.7% over the last week.

4. Chevron Corporation (NYSE:CVX): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $200.20B. 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 3.22%, current ratio at 1.64, and quick ratio at 1.45. The stock has gained 17.83% over the last year.

5. General Electric Company (NYSE:GE): Operates as a technology, service, and finance company worldwide. Market cap of $175.36B. 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 lost 1.89% over the last year.

6. Kraft Foods Inc. (KFT): Manufactures and markets packaged food products worldwide. Market cap of $63.89B. 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 18.99% over the last year.

7. United Technologies Corp. (NYSE:UTX): Provides technology products and services to the building systems and aerospace industries worldwide. Market cap of $66.30B. MRQ Net Profit Margin increased to 8.94% from 8.80% year-over-year, Sales/Assets increased to 0.24 from 0.22, while Assets/Equity decreased to 2.74 from 2.85. The stock has lost 5.15% over the last year.

8. Caterpillar Inc. (NYSE:CAT): Manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Market cap of $56.26B. MRQ Net Profit Margin increased to 7.26% from 7.11% year-over-year, Sales/Assets increased to 0.20 from 0.18, while Assets/Equity decreased to 5.49 from 6.27. It's been a rough couple of days for the stock, losing 8.31% over the last week.

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

Source: 8 DJIA Stocks With Strong Sources Of Profitability