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

39 Pages Posted: 18 Aug 2011 Last revised: 15 Jun 2016

See all articles by Kathryn Chang

Kathryn Chang

University of Toledo

Doina Chichernea

University of Denver - Reiman School of Finance

Hassan R. Hassabelnaby

University of Toledo - Department of Accounting

Date Written: August 17, 2011

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.

Keywords: DuPont, Health Care Industry, Asset Turnover, Profit Margin

JEL Classification: G14, G34, M41

Suggested Citation

Chang, Kathryn and Chichernea, Doina and Hassabelnaby, Hassan R., Can Dupont Analysis Be Used in Assessment of Profitability Performance in the Health Care Industry? (August 17, 2011). Available at SSRN: https://ssrn.com/abstract=1911626 or http://dx.doi.org/10.2139/ssrn.1911626

Kathryn Chang

University of Toledo ( email )

Mail Stop 119, HH 3000
Toledo, OH 43606
United States

Doina Chichernea

University of Denver - Reiman School of Finance ( email )

2101 S. University Blvd
Denver, CO 80208
United States

Hassan R. Hassabelnaby (Contact Author)

University of Toledo - Department of Accounting ( email )

Toledo, OH 43606
United States

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