Evaluating the long-term valuation effect of efficient asset utilization and profit margin on stock returns: Additional evidence from the DuPont identity

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 years t − 1, t − 2 and t − 3. To control for factors that could affect returns over the long windows, they also include returns lagged over years t − 1, t − 2 and t − 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.

Citation

Houmes, R., Jun, C.C., Capriotti, K. and Wang, D. (2018), "Evaluating the long-term valuation effect of efficient asset utilization and profit margin on stock returns: Additional evidence from the DuPont identity", Meditari Accountancy Research, Vol. 26 No. 1, pp. 193-210. https://doi.org/10.1108/MEDAR-12-2016-0104