There are one of only 17 Indian companies out of 500 that aced the Du Pont test
- An efficient company that is improving profitability with low or no debt means that it has used the capital wisely and has the ability to invest more.
- And, according to a report from Motilal Oswal, of the 500 that the broking firm analysed in India, only 17 pass this test based on data from the last five years.
- 15 of these 17 stocks beat the Sensex by a wide margin in the amount of wealth they created for their long-term investors.
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AdvertisementDu Pont Corporation in America used a method to calculate the return on equity— which shows how profitable a company is — which has gone on to become widely used across the world.
The Du Pont analysis breaks down the profitability metric into its key drivers — how efficient its operations are, what is the profit margin and how manageable the debt of the company is. An efficient company that is improving profitability with low or no debt means that it has used the capital wisely and has the ability to invest more.
And, according to a report from Motilal Oswal, of the 500 that the broking firm analysed in India, only 17 pass this test based on data from the last five years.
Here's how the stocks performed:
CAGR: Compounded annual growth rate
|Company||Price CAGR 2015-2020|
DuPont Analysis says the return on equity is net profit margin multiplied by asset turnover and leverage. Essentially, as the report explained, the profit margin 2020 should be wider than what it was 2015, and the asset turnover (sales divided by assets) in 2020 should have improved in the last five years, while the debt should be manageable i.e. debt to equity ratio should be less than one.
Most of these 17 stocks beat the Sensex by a wide margin in the amount of wealth they created for their long-term investors. “Rising margin and asset turn with healthy leverage is a sound formula for investing success,” the report said. Only two of them, both multinational engineering companies, ABB and Siemens, performed worse than the Sensex in the last five years despite having passed the Du Pont test.
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