For Immediate Release
Chicago, IL – April 26, 2021 – Stocks in this week’s article are Pool Corporation POOL, MarineMax, Inc. HZO, XPEL, Inc. XPEL, Boise Cascade Company BCC and UFP Industries, Inc. UFPI.
Have Faith in DuPont Analysis? Buy These 5 Top-Ranked Stocks
If you have to isolate profit-churners from profit-burners, return on equity will come across to you as one of the most appropriate metrics. It is a profitability ratio that measures the earnings a company generates from its equity.
But ROE doesn’t tell the complete story and an investor might get fooled by picking stocks based on this number. If you closely look at the components of ROE, you will be surprised to see that it can be high for the wrong reasons as well. Here comes the DuPont technique which helps investors to analyze basic ROE at an advanced level. Here is 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
Why Use DuPont?
The DuPont analysis allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having 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.
In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. 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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1441083/have-faith-in-dupont-analysis-buy-5-top-ranked-stocks
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UFP Industries, Inc. (UFPI) : Free Stock Analysis Report
Pool Corporation (POOL) : Free Stock Analysis Report
MarineMax, Inc. (HZO) : Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
XPEL, Inc. (XPEL) : Free Stock Analysis Report
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