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

A firm reports net profit margin of 5%, asset turnover of 2 times and an equity multiplier of 3. What is its return on equity under the DuPont analysis?

ROE is 30%. DuPont analysis multiplies net profit margin, asset turnover and equity multiplier: 5% x 2 x 3 = 30%. The 10% figure is only return on assets, which leaves out the effect of financial leverage.

  1. A10%
  2. B15%
  3. C25%
  4. D30%Correct

Explanation

ROE = net margin x asset turnover x equity multiplier = 5% x 2 x 3 = 30%. A figure of 10% is ROA, which omits the leverage multiplier. A figure of 15% results from using only margin and the multiplier without turnover.

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