Can Dupont Analysis Be Used in Assessment of Profitability Performance in the Health Care Industry?

Abstract

This study investigates the usefulness of the information contained in the DuPont Financial Analysis Model for the health care industry equity analysts and stock market investors. By decomposing return on assets into profit margin (PM) and asset turnover (ATO), DuPont analysis allows different market participants to use financial statements in order to extract valuable information about future earnings, equity returns etc. We find that change in ATO is useful in predicting future hospital profitability performance. However, we find that PM, rather than ATO, has relatively more explanatory power in explaining stock returns, unexpected stock returns, and future abnormal returns, suggesting that PM is in general more persistent than ATO. This study contributes to current literature in two ways: (1) it extends the use of DuPont analysis to the health care environment where such analysis is noticeably lacking; and (2) it expands our understanding about the persistence of DuPont components associated with market investors’ use of accounting information within a heavily government regulated health care industry.