DuPont Analysis And Value Evaluation

Long-term since, accounting researchers have worked on the relationship between earnings and security returns. Lots of empirical researches show that current financial statement information would affect future earnings. 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 researches have found that a change in asset turnover is positively related to future changes in earnings. So we can use the information to predict a firm's future earnings and the firm's stock's return. Then we can provide some suggestions to the market investors.This paper is based on the model of Mark T. Soliman, and combining China's stock market scenario, designed some new models for this paper. At the some time, I contrast the traditional DuPont system and the improved DuPont financial system to find the advantages and disadvantages separately.This paper use the 1120 non-financial companies as the samples, which are from our country's two stock exchanges markets, the Shenzhen stock exchange market and Shanghai stock exchange market. And the observe interval is from 1997 to 2008. I do the empirical research by establishing corresponding research models. In addition, I use some Econometrics and Financial Analysis Software to do my research, such as EXCEL, EVIEWS, SAS and so on.First, I make descriptive statistics for the variables in the paper and I found that the financial rations are of big changes between different companies and different time periods, especially on these ratios:ATO, NOA, SIZE, and EPS. Then, I test the information content of DuPont financial analysis system's core index-- net assets yield and the component index—net profit ratio, asset turnover, and financial leverage ratio. What's more, I compared the applicability of the traditional and improved methods of DuPont analysis in Chinese securities markets. The results showed:the traditional DuPont financial core index-- net assets yield is much more efficient than the improved DuPont financial core index-- net operating assets yield in predicting the companies'future earnings. And the operating net assets yield is much better than net assets yield in fitting the stock's current return and forecasting the stock's future return. But both of the traditional DuPont component index and the improved DuPont Component index are of no significant increment information in the prediction of the company's future profitability, fitting stock's current or future earnings. This suggests that in Chinese stock market, investors should pay more attention to the core index of DuPont analysis—the (operating) net assets return rather the component index. Then, this paper made validity analysis according to the time of accounting standard change, whether the company being special trade, the size of the sample companies, different time interval and different sample. At the same time I considered the influence of the estimation methods. At last, I found the result has no qualitative difference with the front conclusion. It shows the above conclusion has good stability.