Interested in finding out ways to analyze a company's profitability? One of the most popular, and telling, methods among analysts is DuPont analysis of return on equity (ROE) profitability.
DuPont analyzes return on equity (ROE, or net income/equity) profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
It therefore focuses 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.
To illustrate DuPont analysis, we ran it on healthcare stocks that have recently been outperforming, with greater than 20% return over the last quarter.
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.
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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 profitability? Use this list as a starting point for your own analysis.
1. Centene Corp. (CNC): Operates as a multiline healthcare company in the United States. The stock increased 38.12% over the last quarter. MRQ net profit margin at 2.23% vs. 2.02% y/y. MRQ sales/assets at 0.639 vs. 0.625 y/y. MRQ assets/equity at 2.257 vs. 2.272 y/y.
2. Hologic Inc. (HOLX): Develops, manufactures, and distributes medical imaging systems, and diagnostic and surgical products for serving the healthcare needs of women. The stock increased 21.12% over the last quarter. MRQ net profit margin at 4.4% vs. 2.53% y/y. MRQ sales/assets at 0.078 vs. 0.076 y/y. MRQ assets/equity at 2.04 vs. 2.057 y/y.
3. Life Technologies Corporation (LIFE): Operates as a life sciences company with a focus on improving the human condition worldwide. The stock increased 25.35% over the last quarter. MRQ net profit margin at 12.6% vs. 7.58% y/y. MRQ sales/assets at 0.11 vs. 0.098 y/y. MRQ assets/equity at 1.978 vs. 2.139 y/y.
4. ZOLL Medical Corp. (ZOLL): Develops, manufactures, and markets resuscitation devices and related software solutions worldwide. The stock increased 109.42% over the last quarter. MRQ net profit margin at 4.96% vs. 3.45% y/y. MRQ sales/assets at 0.281 vs. 0.257 y/y. MRQ assets/equity at 1.288 vs. 1.374 y/y.
*Accounting data sourced from Google Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.