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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

A company reports sales of ₹20,00,000, a net profit margin of 6% and total assets of ₹10,00,000, financed by equity of ₹4,00,000. Using the DuPont identity, what is the return on equity?

Return on equity is 30%. Net profit is 6% of ₹20,00,000, or ₹1,20,000. DuPont multiplies profit margin 6%, asset turnover 2 times and equity multiplier 2.5 to give 30%. The 12% figure is only the return on assets, ignoring leverage.

  1. A30%Correct
  2. B12%
  3. C20%
  4. D6%

Explanation

Net profit = 6% × 20,00,000 = 1,20,000. ROE = net profit/equity = 1,20,000/4,00,000 = 30%. Check by DuPont: margin 6% × asset turnover 2 × equity multiplier 2.5 = 30%. Return on assets alone would be 12%.

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