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 investigates the relations between long-window stock returns and prior years’ increases in DuPont identity components: profit margin and asset turnover. In particular, we examine the relative effectiveness of profit margin and asset turnover to predict years ahead stock returns. Design/methodology/approach – To test our assertions, we 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 our long windows, we 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 increases in 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.