Chicago, IL – February 14, 2020 – Stocks in this week’s article are AllianceBernstein Holding L.P. AB, Vipshop Holdings Ltd. VIPS, Calavo Growers Inc. CVGW, BMC Stock Holdings Inc. BMCH and USANA Health Sciences Inc. USNA.
Though the Wall Street is near a record level, fears of coronavirus are not sparing the investment world. Rise in severity of the disease may derail market momentum. Thus, fears of a correction are understandable. Since market watchers are still predicting decent gains in equities in 2020, it would be wise to bet on quality stocks right now.
Return on equity is one of the most coveted metrics by investors. The metric enables investors to differentiate between a profit-churner and a profit-burner. It is a profitability ratio that measures the earnings that a company generates from its equity.
To shortlist these gems, one can look at the DuPont technique 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)
Although one can’t play down the importance of normal ROE calculation, the fact remains that it doesn’t always provide 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 having higher margins from those having 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.
Investors can simply do this analysis by taking a look at the 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:https://www.zacks.com/stock/news/763799/buy-5-topranked-duponttested-stocks-amid-virus-scare
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