Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How Does Lockheed Martin Boost its Returns?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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.

In this series, we let the DuPont do the work. Let's see what the formula can tell us about Lockheed Martin (NYSE: LMT  ) 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.

What does DuPont say about these four companies?


Return on Equity

Net Margin

Asset Turnover

Leverage Ratio

Lockheed Martin















ManTech International





Source: S&P's Capital IQ

Lockheed Martin has by far the highest returns on equity of the listed companies. How does Lockheed do it? With a leverage ratio more than five times higher than any of the other listed companies, despite having a substantially lower margin. Raytheon (NYSE: RTN  ) has the second highest ROE, with the second highest leverage ratio, which is still far higher than the leverage of the other two companies. ManTech (Nasdaq: MANT  ) and AeroVironment (Nasdaq: AVAV  ) have similar ROEs, despite ManTech's margin being half of its peer's. To offset this, ManTech uses higher asset turnover and more leverage.

While Lockheed Martin has faced tough economic times for defense contractors lately, it has fared reasonably well, despite budget cuts. However, the company has faced some setbacks due to this tough environment. For example, the Department of Defense decided to postpone part of its F-35 purchase, and the company faces threats of other countries canceling or deferring their orders, as well. Lockheed has had to respond to these challenges by looking for growth in other areas.

Some of these attempts have been more successful than others. While Lockheed hopes to win a contract to develop a Joint Light Tactical Vehicle, for example, it -- like competitors Navistar and General Dynamics -- has not managed to develop an appealing prototype. Lockheed has some hope, however, of seeing growth in its F-16 program, due to the fact that the government is looking for alternatives to spy planes developed by Northrop Grumman (NYSE: NOC  ) , which have been having problems.

Using the DuPont formula can often give you some insight into how a company is competing against peers, and what type of strategy it's using to juice return on equity. To find more successful investments, dig deeper than the earnings headlines.

If you'd like to add these companies to your watchlist, or set up a new one, just click below:

Jim Royal has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin, ManTech International, Northrop Grumman, and Raytheon Company. Motley Fool newsletter services recommend AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2055841, ~/Articles/ArticleHandler.aspx, 10/21/2016 11:19:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,066.99 -95.36 -0.53%
S&P 500 2,136.85 -4.49 -0.21%
NASD 5,244.92 3.09 0.06%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 11:01 AM
AVAV $22.28 Down -0.08 -0.36%
AeroVironment CAPS Rating: ****
LMT $230.38 Down -1.46 -0.63%
Lockheed Martin CAPS Rating: ****
MANT $39.13 Up +0.06 +0.15%
ManTech Internatio… CAPS Rating: **
NOC $215.47 Down -1.89 -0.87%
Northrop Grumman CAPS Rating: ****
RTN $136.95 Down -0.36 -0.26%
Raytheon CAPS Rating: ****