The Use of dupont analysis in equity valuation : empirical study of Kenyan market

Abstract

The paper examined the stock market's association with the information in the DuPont components variables through long-window tests and found that the market recognized the future Return on Net Operating Assets, RNOA, and implications of these components. To test whether stock market returns were associated with the DuPont components, the study conducted both long-window association and short-window information tests .There are two parts to the model, a cross-sectional analysis and a time series analysis. The study found that DuPont Decomposition of RNOA had been derived from a theoretical and parsimonious framework of valuation.Moreover, it related to operational assets of the firm unlike other analyses. Consequentially, long window stock returns were positively correlated to changes in asset turnover. The investing Kenyan public has a great deal of interest in the stock market. Unfortunately it is recognized that majority of local investors are not able to fully maximize their returns due to financial illiteracy.The paper seeks to educate investors by improving their financial analysis knowledge as a means to making better decisions that will result to overall improved portfolio performance.