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Determining how profitable a company is can be a tricky task. Not only are there a lot of estimates that go into a company's "net earnings" calculations, there are also many different ways to gauge the final numbers.

One idea to analyze a company's sources of profitability is DuPont analysis of return on equity (ROE).

DuPont analyzes ROE (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.

We ran DuPont analysis on stocks of the tech sector that appear undervalued relative to earnings growth, with PEG below 1.

‪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 stocks should be trading higher? Use this list as a starting point for your own analysis.

1. Apple Inc. (NASDAQ:AAPL): Designs, manufactures, and markets personal computers, mobile communication and media devices, and portable digital music players, as well as sells related software, services, peripherals, networking solutions, and third-party digital content and applications worldwide. PEG at 0.78. MRQ net profit margin at 28.2% vs. 22.45% y/y. MRQ sales/assets at 0.334 vs. 0.308 y/y. MRQ assets/equity at 1.54 vs. 1.587 y/y.

2. InfoSpace Inc. (INSP): Develops search tools and technologies that assist consumers with finding content and information on the Internet. PEG at 0.74. MRQ net profit margin at 35.45% vs. 18.22% y/y. MRQ sales/assets at 0.168 vs. 0.141 y/y. MRQ assets/equity at 1.113 vs. 1.169 y/y.

3. Sykes Enterprises, Incorporated (NASDAQ:SYKE): Provides outsourced customer contact management solutions and services in the business process outsourcing arena. PEG at 0.89. MRQ net profit margin at 5.99% vs. 4.64% y/y. MRQ sales/assets at 0.387 vs. 0.361 y/y. MRQ assets/equity at 1.357 vs. 1.377 y/y.

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

Source: 3 Undervalued Tech Stocks With Strong Sources Of Profitability