Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

Financial Return on Equity (FROE): A New Extended Dupont Approach

Author(s): Pablo Jose Arana Barbier

The DuPont analysis was born with two elements: asset turnover and profit margin. Subsequently, financial leverage was included as a third element. However, the sustainability of a Company depends on the result of more than three financial ratios, and it is necessary not only an accounting approach, but also a financial one, which has not been defined yet. The objective of the article is to propose a new decomposition of the DuPont analysis, more extended under financial criteria to aim not only to enhance profitability, but also cash generation. The starting point is the three-element DuPont model. The analysis was conducted with data from 34 industrial companies that list publicly at the Lima Stock Exchange (Peru) from 2013 to 2018, through a multiple linear regression of the main variables defined based on the literature review. The research proposes seven elements (six statistically validated for Peru), which aim not only to contribute to accounting and financial theory, but to better decision-making. The application of the model is immediate for entrepreneurs and managers with a practical application at any business level.