This paper investigates the relation between the ratios resulting from the two different possibilities of ROE decomposition (known in literature as DuPont and modified DuPont analysis) and Brazilian firms' stock returns. Differently from traditional DuPont analysis, the modified DuPont analysis explicitly splits operating and financial performance. To put in practice our analysis, we consider Brazilian firms listed from 1995 to 2008. Our results suggest that ROA (derived from traditional DuPont analysis) has higher explanatory power than operational ROA (derived from modified DuPont analysis) regarding stock returns. Further results show that operating components better explain stock returns than financial components.
ROA; DuPont model; Financial analysis
