Evaluating the long-term valuation effect of efficient asset utilization and profit margin on stock returns

Purpose - This study aims to investigate the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, the authors examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns. Design/methodology/approach - To test the assertions, the authors regress raw, Capital Asset Pricing Model and Fama-French returns on controls and variables of interest, profit margin and asset turnover, lagged yearst− 1,t− 2 andt− 3. To control for factors that could affect returns over the long windows, they also include returns lagged over yearst− 1,t− 2 andt− 3 to coincide with the lagged profit margin and asset turnover variables of interest. Findings - Results show a negative (positive) relation between returns and increases in lagged profit margin (asset turnover). However, the negative returns-profit margin relation is mitigated when increases in profit margin and asset turnover occur in the same lagged year. Originality/value - This study adds to the existing body of research on the DuPont identity by temporally evaluating the relative long-run contributions of profit margin and asset turnover to firm value.