Zacks
Zacks.com featured highlights: NVR, American Woodmark, Nutrisystem, Best Buy and Comfort Systems USA
Zacks Equity Research
Updated

For Immediate Release

Chicago, IL – March 15, 2017 - Stocks in this week’s article include NVR Inc. (NYSE: NVR – Free Report ), American Woodmark Corporation ( NASDAQ: AMWD – Free Report ), Nutrisystem Inc. ( NASDAQ: NTRI – Free Report ), Best Buy Co. Inc. ( NYSE: BBY – Free Report ) and Comfort Systems USA Inc. ( NYSE: FIX – Free Report ) .

Screen of the Week of Zacks Investment Research:

5 Top-Ranked Picks Using DuPont Analysis

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)

ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier

Why Use DuPont?

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.

Screening Parameters

• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.

• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.

• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.

• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.

• Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.

Here are five of the seven stocks that made it through the screen:

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