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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis

A company reports net sales of Rs 800 crore, average total assets of Rs 500 crore and net profit of Rs 40 crore. Using the DuPont three-step approach, what is its return on equity if average shareholders' equity is Rs 250 crore?

ROE is 16%. Net margin of 5% multiplied by asset turnover of 1.6 and an equity multiplier of 2 gives 16%, which matches net profit of Rs 40 crore divided by equity of Rs 250 crore. Ignoring leverage would give only 8%, the return on assets.

  1. A5.0%
  2. B8.0%
  3. C16.0%Correct
  4. D10.0%

Explanation

Net margin = 40/800 = 5%. Asset turnover = 800/500 = 1.6. Equity multiplier = 500/250 = 2. ROE = 5% x 1.6 x 2 = 16%, which also equals 40/250. Omitting the equity multiplier gives 8% (that is ROA), a common mistake.

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