On the DuPont analysis in the health care industry

Abstract

Prior research documents that the DuPont components of return on net operating assets (profit margin and asset turnover) represent an incremental source of information about the operating characteristics of a firm and are useful tools for market participants (Soliman, 2008). We find that the informativeness of DuPont components about future profitability is reduced in the healthcare setting, relative to an all-industry sample. Moreover, to the extent that DuPont components are useful for market participants, we show that profit margin is more persistent than asset turnover for US for-profit health care providers, which contradicts the results documented in prior literature that considered all industries. We argue that the special features of the health care industry (i.e. heavy regulation, unique operational characteristics) affect the information content of accounting signals obtained based on financial statements.