Determinants of return-on-equity in USA, German and Japanese manufacturing firms

Abstract

Purpose

DuPont financial analysis is generally used in micro-economic studies to compare an individual firm’s financial performance with industry averages. The purpose of this paper is to undertake a macro-economic cross-sectional analysis of the determinants of return-on-equity (ROE) in USA, German and Japanese manufacturing firms.

Design/methodology/approach

The authors use cross-sectional log-linear multivariate regression analysis to determine the elasticity of ROE to changes in net profit margin (NPM), total assets turnover (TAT) and equity multiplier (EQM) in USA, German and Japanese manufacturing firms. The authors obtain the data for the analysis from the COMPUSTAT Research Insight/Global Vintage database.

Findings

With data for all manufacturing firms, the authors find that the most important determinant of ROE is NPM in all three countries. The least important determinant of ROE is TAT in the USA and Germany, and EQM in Japan. Electronics is the most important manufacturing industry in all three countries, the authors also apply the analysis to data for the electronics manufacturing firms in the three countries. The authors find that an increase of 10 percent in NPM increases ROE by about 9.8 percent in Germany, by about 8.3 percent in the USA, and by about 6.9 percent in Japan. An increase of 10 percent in TAT increases ROE by about 2.2 percent in Germany and by about 1.5 percent in Japan. An increase of 10 percent in EQM increases ROE by about 1.9 percent in Germany and by about 1.5 percent in the USA.

Practical implications

The empirical findings of this study can provide useful insights for financial managers regarding the determinants of ROE they should focus on to achieve the greatest impact on ROE.

Originality/value

DuPont analysis is generally used as a micro-economic tool at the firm level. This study is a macro-economic application of the tool to study the cross-sectional determinants of ROE at the industry level.

Citation

Weidman, S.M., McFarland, D.J., Meric, G. and Meric, I. (2019), "Determinants of return-on-equity in USA, German and Japanese manufacturing firms", Managerial Finance, Vol. 45 No. 3, pp. 445-451. https://doi.org/10.1108/MF-07-2018-0305