Competitive Strategy and Financial Ratios

Abstract

We examine whether asset turnover and profit margin ratios reflect a firm's competitive strategy. We show the following: (a) the RNOA, asset turnover and profit margins are firm-specific rather than industry-specific, indicating that these ratios provide information on the firm's operating choices. (b) The profit margin and asset turnover ratios are negatively correlated, as indicated by the notion that these ratios provide information on the firm's competitive strategy. (c) The profit margin (asset turnover) ratio exhibits a higher degree of persistence for firms pursuing the profit margin (asset turnover) strategy, indicating that these ratios provide information on operating choices. Finally, we show that incorporating the asset turnover and profit margin strategies improve the prediction of future RNOA.