9 Dividend Stocks With Strong Cash-Flow Coverage and Sources of Profitability
By Kapitall:A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks. One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability. ROE can be broken up into three components such that increases in ROE can be attributed to those components. ROE = (Net Profit/Equity) = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity) = (Net Profit margin)*(Asset turnover)*(Leverage ratio) Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with, • Decreasing leverage, i.e. decreasing Asset/Equity ratio • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio) Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage. To illustrate thisComplete Story »
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