An Application of Constant Market Share Analysis for the Study of Firm Profitability

Giovanni Marini

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a new decomposition of the return on investment (ROI) – the main accounting measure of firm profitability – to evaluate the contributions of its three components: the return on sales (ROS), the utilization (rotation) of working capital (RCC), and the utilization (rotation) of fixed capital (RCF). By using this decomposition we develop an original variant of the constant market share (CMS) analysis specifically for comparisons of firm average profitability between countries and over time. The proposed CMS methodology allows us to separate the variation of the average ROI over time (or its difference between two countries) in three components: a competitiveness effect – the difference of average ROI assuming the same reference structure for the two terms of comparison – a structure effect – the result of the difference in the internal articulation of the ROI by sector and by size structure within the two terms of comparison – and an adaptation effect, which takes into account the synergies between the two previous components. The decomposition of the ROI in the product of the three terms, ROS, RCC and RCF, plays an original role in the interpretation of the competitiveness effect. An application of the proposed methodology is carried out for the comparison of the average ROI in the industrial sector among Germany, Italy and France and over the years 2006-2008.

Keywords: constant market share analysis; return on investment; return on sales; rotation of invested capital; comparison over time; comparison over countries (search for similar items in EconPapers)
JEL-codes: C43 L60 L70 M41 (search for similar items in EconPapers)
Date: 2010-09-28
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (2)

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