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

A firm has net profit of ₹90 crore, net sales of ₹1,500 crore, average total assets of ₹900 crore and average shareholders' equity of ₹450 crore. Using the DuPont three-step method, what is its return on equity?

Under the DuPont method, ROE equals net margin times asset turnover times equity multiplier. That is 6% times 1.667 times 2, giving 20%. This equals net profit of 90 crore divided by average equity of 450 crore, confirming the result.

  1. A10%
  2. B20%Correct
  3. C6%
  4. D15%

Explanation

Net margin = 90/1500 = 6%. Asset turnover = 1500/900 = 1.6667. Equity multiplier = 900/450 = 2. ROE = 0.06 x 1.6667 x 2 = 20%, which matches 90/450. Using 10% would ignore leverage (ROA only), and 6% is just the net margin.

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