Abstract:

Financial statements provide information that could explain the return on equity. The DuPont extended model identifies 5 important ratios/indicators that might explain the performance of a company – tax effect, interest burden, EBIT margin, assets turnover and financial leverage. This study aims to analyze the relevance of the tax effect on the “return on equity” (ROE) when compared with the other DuPont model factors. For the purpose of the study we selected a sample based on listed companies from the stock markets of France, Germany, Portugal and Spain. The number of companies of the sample is 644. The Ordinary Least Square (OLS) method was used to determine the individual impact of each factor on the “return on equity”. According to our findings, the tax effect plays the most important rule in order to explain the return on equity.