How Does Career Education Boost Its Returns?

As investors, we need to understand how our companies truly make their money. A neat trick developed for just that purpose — the DuPont formula — can help us do so.

So in this series, we let the DuPont do the work. Let's see what the formula can tell us about Career Education (Nasdaq: CECO ) and a few of its peers.

The DuPont formula can give you a better grasp on exactly where your company is producing its profit, and where it might have a competitive advantage. Named after the company where it was pioneered, the formula breaks down return on equity into three components:

  • Return on equity = net margin x asset turnover x leverage ratio
  • What makes each of these components important?
  • High net margins show that a company can get customers to pay more for its products. Luxury-goods companies provide a great example here.
  • High asset turnover indicates that a company needs to invest less of its capital since it uses its assets more efficiently to generate sales. Service industries, for instance, often lack big capital investments.
  • Finally, the leverage ratio shows how much the company is relying on liabilities to create its profits.

Generally, the higher these numbers, the better. That said, too much debt can sink a company, so beware of companies with very high leverage ratios.

So what does DuPont say about these four companies?

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THE MOTLEY FOOL

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