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Using Asset Turnover and Profit Margin to Forecast Changes in Profitability

Author

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  • Patricia M. Fairfield

    (Georgetown University)

  • Teri Lombardi Yohn

    (Georgetown University)

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.

Suggested Citation

  • Patricia M. Fairfield & Teri Lombardi Yohn, 2001. "Using Asset Turnover and Profit Margin to Forecast Changes in Profitability," Review of Accounting Studies, Springer, vol. 6(4), pages 371-385, December.
    • Handle: RePEc:spr:reaccs:v:6:y:2001:i:4:d:10.1023_a:1012430513430
    DOI: 10.1023/A:1012430513430
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    References listed on IDEAS

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    Cited by:

    1. Adam Esplin & Max Hewitt & Marlene Plumlee & Teri Lombardi Yohn, 2014. "Disaggregating operating and financial activities: implications for forecasts of profitability," Review of Accounting Studies, Springer, vol. 19(1), pages 328-362, March.
    2. Eli Amir & Itay Kama & Joshua Livnat, 2011. "Conditional versus unconditional persistence of RNOA components: implications for valuation," Review of Accounting Studies, Springer, vol. 16(2), pages 302-327, June.
    3. Asher Curtis & Melissa F. Lewis-Western & Sara Toynbee, 2015. "Historical cost measurement and the use of DuPont analysis by market participants," Review of Accounting Studies, Springer, vol. 20(3), pages 1210-1245, September.
    4. James M. Wahlen & Matthew M. Wieland, 2011. "Can financial statement analysis beat consensus analysts’ recommendations?," Review of Accounting Studies, Springer, vol. 16(1), pages 89-115, March.

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