NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Financial Analysis
Aarav Textiles has net sales of Rs 600 crore, average total assets of Rs 400 crore, net profit of Rs 30 crore and average shareholders' equity of Rs 150 crore. Using the three-step DuPont analysis, what is its return on equity?
ROE is 20%. Net margin of 5% multiplied by asset turnover of 1.5 and an equity multiplier of about 2.667 gives 20%. This equals net profit of Rs 30 crore divided by equity of Rs 150 crore. The 7.5% figure is only return on assets.
- A20%Correct
- B7.5%
- C5%
- D30%
Explanation
Net margin = 30/600 = 5%. Asset turnover = 600/400 = 1.5. Equity multiplier = 400/150 = 2.667. ROE = 5% x 1.5 x 2.667 = 20%, which matches 30/150 = 20%. The 7.5% option is ROA (5% x 1.5) and omits leverage.
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