Could Profitability, Efficiency, and Financial Leverage Signal Return on Equity: An Application of DuPont Analysis in Thailand Setting?
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Abstract
This study aimed to examine a relationship between profitability, efficiency, along with financial leverage and Return on Equity (hereinafter referred to as ROE) of big market capitalization (hereinafter referred to as big market cap) companies listed on the Stock Exchange of Thailand (hereinafter referred to as the SET). This study used both simple regression and multiple regression to analyze and compare the results of the DuPont ratios of 93 big market cap companies listed on setting 100 index constituents (including 6 companies on the reserve list) during 2015-2019, a five-year study period. Moreover, cross-sectional data approach and time-series data approaches are employed in this study. The results from simple regression indicate that net profit margin is significant to explain ROE, but total asset turnover and equity multiplier are not significant to explain ROE. Notwithstanding this, the result from multiple regression indicates that a combination of net profit margin, total asset turnover, and equity multiplier is significant to explain ROE. This evidence suggests that management, analysts, and the like should carefully apply DuPont ratios to forecast the future earnings of a company. In other words, DuPont ratios should not be separately used, resulting in underestimating this comprehensive financial tool to predict the future earnings of a company.
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