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Forecasting operating profitability with DuPont analysis

Author

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  • Mark P. Bauman

Abstract

Purpose - – The purpose of this study is to re-examine the relation between changes in profit margin (ΔPM) and changes in return on net operating assets (ΔRNOA) by partitioning on the direction of the change in PM. DuPont analysis provides a means of disaggregating a firm’s return on net operating assets (RNOA) into asset turnover (ATO) and profit margin (PM) components to gain insights into the underlying drivers of operating profitability. Prior research finds that changes in ATO are informative about one-year-ahead changes in RNOA, while changes in PM are not. Design/methodology/approach - – Consistent with prior research, regression analysis is used to develop a predictive model for one-year-ahead changes in RNOA. Results based on in-sample parameter estimates are used to examine the out-of-sample forecasting accuracy of alternative model specifications. Findings - – The results are consistent with significant forecast improvement resulting from considering the impact on future RNOA of the direction of the ΔPM. Originality/value - – The study contributes to the literature on the determinants of profitability ratios by providing further guidance on how financial statement information can be utilized to improve forecasts of firm performance.

Suggested Citation

  • Mark P. Bauman, 2014. "Forecasting operating profitability with DuPont analysis," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 13(2), pages 191-205, May.
    • Handle: RePEc:eme:rafpps:v:13:y:2014:i:2:p:191-205
    DOI: 10.1108/RAF-11-2012-0115
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    Citations

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    Cited by:

    1. Yue Hao & Seung Uk Choi, 2019. "Operating Performance of Chinese Online Shopping Companies: An Analysis Using DuPont Components," Sustainability, MDPI, vol. 11(13), pages 1-13, June.
    2. Bunea, Ovidiu-Iulian & Corbos, Razvan-Andrei & Popescu, Ruxandra-Irina, 2019. "Influence of some financial indicators on return on equity ratio in the Romanian energy sector - A competitive approach using a DuPont-based analysis," Energy, Elsevier, vol. 189(C).
    3. Mundt, Philipp & Alfarano, Simone & Milaković, Mishael, 2020. "Exploiting ergodicity in forecasts of corporate profitability," Journal of Economic Dynamics and Control, Elsevier, vol. 111(C).
    4. Eli Amir & Itay Kama & Shai Levi, 2015. "Conditional Persistence of Earnings Components and Accounting Anomalies," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 801-825, September.
    5. Luis Manuel Tovar Rocha & Julio Téllez Pérez & Gabriel Alberto Agudelo Torres, 2022. "The Relationship Between Share Prices and DUPONT Model Components: Evidence from Mexican Stock Market," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 17(1), pages 1-13, Enero - M.
    6. Mattia Iotti & Giuseppe Bonazzi, 2023. "Financial Sustainability in Agri-Food Companies: The Case of Members of the PDO Parma Ham Consortium," Sustainability, MDPI, vol. 15(5), pages 1-31, February.
    7. repec:msn:gcaocc:16-10 is not listed on IDEAS
    8. Giuseppe Bonazzi & Paolo Camanzi & Giovanni Ferri & Elisa Manghi & Mattia Iotti, 2021. "Economic Sustainability of Pig Slaughtering Firms in the Production Chain of Denomination of Origin Hams in Italy," Sustainability, MDPI, vol. 13(14), pages 1-18, July.

    More about this item

    Keywords

    Financial statement analysis; Return on assets; DuPont decomposition; M41;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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