NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
A company reports revenue of Rs 800 crore, average total assets of Rs 500 crore, net profit of Rs 40 crore and average shareholders' equity of Rs 200 crore. Using the three-step DuPont analysis, what is its return on equity?
ROE is 20%. Net margin is 5%, asset turnover is 1.6 times and the equity multiplier is 2.5, and their product is 20%. This equals net profit of Rs 40 crore divided by equity of Rs 200 crore. The 8% figure is ROA, which ignores leverage.
- A20%Correct
- B8%
- C5%
- D32%
Explanation
Net margin = 40/800 = 5%. Asset turnover = 800/500 = 1.6. Equity multiplier = 500/200 = 2.5. ROE = 5% x 1.6 x 2.5 = 20%, which matches 40/200 = 20%. 8% is margin times turnover (ROA), missing leverage.
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