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

Robert Houmes, Charlie Chulee Jun, Kim Capriotti and Daphne Wang

Meditari Accountancy Research, 2018, vol. 26, issue 1, 193-210

Abstract: 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.

Keywords: Stock returns; Financial statement analysis; DuPont analysis; Asset turnover; Profit margin (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:medarp:medar-12-2016-0104

DOI: 10.1108/MEDAR-12-2016-0104

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