Profitability is one of the most important parts of a stock analysis, but how do you choose among the many different ways to compare profitability? One idea is to use DuPont analysis of return on equity (ROE) profitability.
To illustrate we ran a screen. We began by screening the tech sector for stocks that have outperformed the market over the last quarter, with over 20% return.
Then to analyze these companies' profitability, we ran DuPont analysis on the names. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these 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)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
Interactive Chart: Press Play to compare changes in market cap over the last two years for the 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 tech companies will continue to outperform? Use this list as a starting point for your own analysis.
List sorted by performance over the last quarter.
1. Viasystems Group Inc. (NASDAQ:VIAS): Provides multi-layer printed circuit boards and electro-mechanical solutions worldwide. Market cap at $453.07M, most recent closing price at $22.38. Performance over the last quarter at 30.78%. MRQ net profit margin at 5.57% vs. 3.64% y/y. MRQ sales/assets at 0.321 vs. 0.312 y/y. MRQ assets/equity at 2.9 vs. 3.087 y/y.
2. Syntel, Inc. (NASDAQ:SYNT): Provides information technology and knowledge process outsourcing services worldwide. Market cap at $2.53B, most recent closing price at $60.31. Performance over the last quarter at 29.00%. MRQ net profit margin at 23.86% vs. 17.23% y/y. MRQ sales/assets at 0.265 vs. 0.255 y/y. MRQ assets/equity at 1.174 vs. 1.192 y/y.
3. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC): Provides software products and software-enabled services to the financial service providers worldwide. Market cap at $1.79B, most recent closing price at $23.70. Performance over the last quarter at 25.73%. MRQ net profit margin at 13.86% vs. 10.66% y/y. MRQ sales/assets at 0.079 vs. 0.067 y/y. MRQ assets/equity at 1.232 vs. 1.488 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.