Zacks.com Featured Highlights Include: Calavo Growers, BMC Stock, Vipshop And AllianceBernstein
Zacks Investment Research | Jan 29, 2020 10:04PM ET
For Immediate Release
Chicago, IL – January 30, 2020 – Stocks in this week’s article are Calavo Growers Inc. (NASDAQ:CVGW) , BMC Stock Holdings Inc. (NASDAQ:BMCH) , Vipshop Holdings Ltd. (NYSE:VIPS) and AllianceBernstein Holding L.P. (NYSE:AB) .
Deploy DuPont (NYSE:DD) Strategy to Pick 4 Healthy Stocks
With global markets suffering due to the coronavirus attack, it is very important now to remain alert at the time of stock picking. While doing so, a look at the return-on-equity (ROE) ratio would be a good strategy.
It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare this to historical or industry benchmarks to pick a winning stock.
However, delving a little deeper into the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis excels.It is an analytical method, which examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show how DuPont breaks down ROE into its different components:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier
Importance of Using DuPont
Although one cannot brush off the importance of normal ROE calculation, the fact remains that it doesn’t always portray a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies with higher margins from those having a high turnover. For example, high-end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.
And one of the ROE components – equity multiplier (explained below) – can help you judge how burdened a company is with debts. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.
So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins over and spots the better stock.
Investors can simply do this analysis by taking a look at a company’s financials. However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.
For the rest of this Screen of the Week article please visit Zacks.com at: Zacks Investment Research
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