Using asset turnover and profit margin to forecast changes in profitability: Evidence for Philippine companies
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2005
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Abstract
The disaggregation's of the overall profitability measures of ROA (return on assets) and ROE (Return on equity) are usually used to analyze a firms performance. Most evaluations of profit performance start with the ratio of return on assets (ROA). Research studies suggest that to understand firm value requires forecasts of future return on operating assets, thus the emphasis of Fairfield's and Yohn's paper is on the prediction of return on net operating assets (RNOA) for the analysis. This research paper was patterned after the study of Fairfield and Yohn (2001), which made use of the disaggregation of return on net operating assets (RNOA). Even if they did not specifically mention the Du Ponts ROI, it can be surmised that their research made use of Du Ponts model and then develop their own models to forecast the changes in profitability, defined as the change of return on net operating assets. Fairfield and Yohn hypothesized on the following: 1) that the fundamental decomposition of return on assets presented in textbooks is useful in a forecasting context 2) that the disaggregation of the level of return on assets into asset turnover and profit margin will not improve predictions of the change in profitability, defined as the change in return on assets, one year ahead 3) whether the year-to-year changes in asset turnover and changes in profit margin provide incremental information over the change in total return on assets for forecasts of the change in vii return on assets one year ahead and 4) that the change in asset turnover will be informative about future profitability while the change in profit margin will not be informative about future profitability. To test the hypotheses on the prediction of changes in profitability, Fairfield and Yohn developed models, where the return on net operating assets is the dependent variable and to test the last hypothesis on the prediction of change in operating income, they also made use of the same models except that the operating income is the dependent variable. Following the study made by Fairfield and Yohn, this paper tested these hypotheses: (1) whether the fundamental disaggregation of return on assets or return on investment presented in textbooks is significant in forecasting profitability one year ahead; (2) whether the disaggregation of return on net operating assets into asset turnover and profit margin provide significant improvement in the forecasts of changes in profitability, defined as return on
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| Authors | Estrada, Roma Santa Rodriguez |
| Journal | Malay Journal |
| Year | 2005 |
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| Keywords | Keywords not found |
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