(Article by Becca Lipman, list compiled by Eben Esterhuizen, CFA. ROE data sourced from Google Finance, all other data sourced from Finviz.)
Interested in large tech companies with solid return on equity trends? You’ve come to the right place.
To create this list we started with a universe of the 200 largest tech companies by market cap.
Next, we performed a DuPont analysis, breaking the Return on Equity (ROE) equation into three parts:
ROE = (Net Profit/Equity) = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) = (Profit margin)*(Asset turnover)*(Equity multiplier)
All of the stocks mentioned below have seen a rising ROE during the recent quarter.
Want clarification on these terms, as well as their implications? Let’s take a closer look:
Market capitalisation (Market Cap): Market capitalisation, commonly referred to as market cap, is the total market value of a company’s outstanding shares. It can be thought of as a measure of company’s size. It can be calculated by multiplying the number of shares by the current price of the shares. Companies with higher market cap are considered to have more trustworthy information because they have greater histories of profitability and data.
Encouraging DuPont Trends: Amidst the information overload, investors are sometimes quick to look at a profitability measure like return on equity (ROE) and assume that a company has a clean bill of health.
The problem with this is that profitability can come from many sources – some better than others. But in the 1920s, the DuPont Corporation developed a useful equation that breaks down ROE into three components.
ROE = Net Profit Margin x Asset Efficiency x Financial Leverage
Net profit margin reflects cost structure, asset efficiency reflects productivity, and financial leverage is use of debt. Increases in any of the three can contribute to increased profitability.
Generally speaking, increases in net profit margin and asset efficiency are positive changes, while increases in financial leverage are not a preferred source of equity return.
Now that you’re prepared, let’s take a look at the list below. Use it as a starting-off point in your own analysis.
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List sorted by market cap.
1. QUALCOMM Incorporated (QCOM): Engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. MRQ net profit margin at 28.57% vs. 28.41% y/y. MRQ sales/assets at 0.103 vs. 0.092 y/y. MRQ assets/equity at 1.336 vs. 1.478 y/y.
2. Agilent Technologies Inc. (A): Provides bio-analytical and electronic measurement solutions to the communications, electronics, life sciences, and chemical analysis industries in the United States and internationally. MRQ net profit margin at 19.52% vs. 14.81% y/y. MRQ sales/assets at 0.193 vs. 0.152 y/y. MRQ assets/equity at 2.088 vs. 3.248 y/y.
3. CA Technologies (CA): Designs, develops, markets, delivers, licenses, and supports information technology (IT) management software products that operate on a range of hardware platforms and operating systems. MRQ net profit margin at 20.72% vs. 20.3% y/y. MRQ sales/assets at 0.098 vs. 0.095 y/y. MRQ assets/equity at 2.071 vs. 2.213 y/y
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
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