Connecting productivity to return on assets through financial statements: Extending the Dupont method

Abstract

Purpose

The purpose of this paper is to extend the Du Pont method by connecting productivity and profitability through financial statements focusing on the two most common productivity indicators for companies: total factor productivity (TFP) and labour productivity.

Design/methodology/approach

The first part of the paper uses a deductive approach to obtain a new productivity rate of return. The second part applies the methodology of financial statements analysis to develop an empirical application of the findings.

Findings

The main finding is a functional relationship among the return on operating assets (ROOA), TFP and labour productivity. From it, the paper obtains a productivity rate of return that synthesizes both productivity measures. The ROOA is broken down into the sum of three parts: productivity, price change, and a crossed effect between turnover and price change.

Practical implications

The model developed in this paper enables analysts and managers to deepen in the causes of margin and turnover and, thus, in the causes of ROOA. To the extent that the separation between productivity and price change effects adds clarity to the knowledge of the causes of ROOA, it creates, at the same time a basis for making more precise decisions in order to improve corporate performance.

Originality/value

This paper differs from other studies by presenting the return of operating assets as a variable that depends on productivity ratios. Financial statement analysis has only occasionally incorporated productivity measures among the variables regarded as the drivers of a companys economic performance.

Citation

Bosch‐Badia, M.T. (2010), "Connecting productivity to return on assets through financial statements: Extending the Dupont method", International Journal of Accounting & Information Management, Vol. 18 No. 2, pp. 92-104. https://doi.org/10.1108/18347641011048093