Regression-Based Forecasting Using the DuPont Model

The DuPont Model can be used to forecast future changes in ROA using the regression equation, which can be written as follows:

The variables represented in the equation are:

• CFM equals cash flow margin.

• AT equals asset turnover.

Using historical data, the regression equation can develop regression coefficients to quantify the impact of cash flow margin and asset turnover. This analysis can provide insights on how the independent variables can change ROA and the lagging effects of changes in the business, such as fluctuations in cash flow margin. There may be cyclical patterns in margins based on industry behaviors or economic trends that are not accounted for in the DuPont equation. These fluctuations provide insight into whether a Strategic Alternative can achieve changes in the drivers of financial performance. They are algebraically depicted in the "a" term of the equation.