Using Asset Turnover and Profit Margin to Forecast Changes in Profitability

Using Asset Turnover and Profit Margin to Forecast Changes in Profitability Financial statement analysis textbooks advocate disaggregating profitability into asset turnover and profit margin in performing financial analysis. In spite of the prominence of this technique, there is no evidence demonstrating its usefulness in a forecasting context. We provide evidence that disaggregating return on assets into asset turnover and profit margin does not provide incremental information for forecasting the change in return on assets one year ahead, but that disaggregating the change in return on assets into the change in asset turnover and the change in profit margin is useful in forecasting the change in return on assets one year ahead. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Using Asset Turnover and Profit Margin to Forecast Changes in Profitability

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2001 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1012430513430
Publisher site
See Article on Publisher Site

Abstract

Financial statement analysis textbooks advocate disaggregating profitability into asset turnover and profit margin in performing financial analysis. In spite of the prominence of this technique, there is no evidence demonstrating its usefulness in a forecasting context. We provide evidence that disaggregating return on assets into asset turnover and profit margin does not provide incremental information for forecasting the change in return on assets one year ahead, but that disaggregating the change in return on assets into the change in asset turnover and the change in profit margin is useful in forecasting the change in return on assets one year ahead.

Journal

Review of Accounting StudiesSpringer Journals

Published: Oct 3, 2004

References

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