DuPont Analysis and the Persistence of Components - Could the decomposition of RNOA provide strategic guidance for companies?

Abstract: This study aims to investigate whether the DuPont relationship may be used to derive key strategic decisions that will yield sustainable levels of return on net operating assets, RNOA. By adjusting RNOA and its DuPont components asset turnover, ATO, and profit margin, PM, for industry medians, the study facilitates a comparison on a cross-industry level and concludes that RNOA is subject to economy-wide convergence while ATO and PM converge toward the industry median. The results further determine that the persistence of ATO is greater than of PM and that the convergence of RNOA will be lower in dynamic markets when abnormal profitability is derived from abnormal levels of ATO. The study does however not manage to provide a general conclusion regarding the definite impact of DuPont components on operating profitability and the strategic causalities they may be adhered to.