The Use of Dupont Analysis by Market Participants

51 Pages Posted: 5 Mar 2008

See all articles by Mark T. Soliman

Mark T. Soliman

University of Southern California - Marshall School of Business

Date Written: October 2007


DuPont analysis, a common form of financial statement analysis, decomposes return on net operating assets into two multiplicative components: profit margin and asset turnover. These two accounting ratios measure different constructs and, accordingly, have different properties. Prior research has found that a change in asset turnover is positively related to future changes in earnings. This paper comprehensively explores the DuPont components and contributes to the literature along three dimensions. First, the paper contributes to the financial statement analysis literature and finds that the information in this accounting signal is in fact incremental to accounting signals studied in prior research in predicting future earnings. Second, it contributes to the literature on the stock market's use of accounting information by examining immediate and future equity return responses to these components by investors. Finally, it adds to the literature on analysts' processing of accounting information by again testing immediate and delayed response of analysts through contemporaneous forecast revisions as well as future forecast errors. Consistent across both groups of market participants, the results show that the information is useful as evidenced by associations between the DuPont components and stock returns as well as analyst forecast revisions. However, I find predictable future forecast errors and future abnormal returns indicating that the information processing does not appear to be complete. Taken together, the analysis indicates that the DuPont components represent an incremental and viable form of information about the operating characteristics of a firm.

Keywords: Financial Statement Analysis, DuPont Analysis, Market Returns, Analyst Forecasts

JEL Classification: M41, G29, G12, G14

Suggested Citation

Soliman, Mark T., The Use of Dupont Analysis by Market Participants (October 2007). Available at SSRN: or

Mark T. Soliman (Contact Author)

University of Southern California - Marshall School of Business ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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