Without rising sales and profits, a company's stock would find itself stuck in the mud. That's why many market watchers pay so much attention to trends in a company's revenue, earnings, and margins each quarter. If it can boost sales, earnings, and margins over a long stretch of time, you could have a winner on your hands.
One of the common measures of profitability is return on equity (ROE) -- net income divided by average common equity (or net worth). ROE can vary widely among companies. For example, for 2005, Colgate-Palmolive (CL
) sported a high ROE of 128%, while General Motors (GM
) had a dismal reading of about -48%. Investors should look for positive ROE, and if this measure is moving up, it serves as a good sign the company is improving its return on the shares owned.
Although the earnings-per-share numbers get most of the attention when companies report results, they don't include the amount a company had to spend to make and sell its products or services. A company's net profit margin reveals how much it actually earns on its sales after all expenses and taxes. Again, look for a trend of rising net profit margins.
THE SELECT FEW. That brings us to this week's screen. First, we combed our database for the stocks with a 4 (buy) or 5 (strong buy) STARS ranking or better by S&P Equity Analysts. Then we required those issues have increases in ROE, sales, and net profit margin for each of the past five years. Indeed, this was a stringent test, and only four stocks passed.