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

Arjun Ltd. has the following: net profit after tax ₹6,00,000, net profit margin 5%, total assets turnover 2 times, and equity multiplier (total assets/equity) 1.5. Using the DuPont identity, what are the total assets and return on equity?

Total assets are ₹60,00,000 and ROE is 15%. Sales are ₹1.2 crore from the 5% margin on ₹6,00,000 profit; assets turnover of 2 gives assets of ₹60 lakh. DuPont ROE equals 5% × 2 × 1.5, which is 15%.

  1. ATotal assets ₹60,00,000; ROE 15%Correct
  2. BTotal assets ₹60,00,000; ROE 20%
  3. CTotal assets ₹12,00,000; ROE 15%
  4. DTotal assets ₹30,00,000; ROE 30%

Explanation

Sales = 6,00,000/5% = ₹1,20,00,000. Total assets = Sales/2 = ₹60,00,000. Equity = 60,00,000/1.5 = ₹40,00,000. ROE = 6,00,000/40,00,000 = 15%; DuPont check: 5% × 2 × 1.5 = 15%. The 20% option uses an equity multiplier of 2 mistakenly.

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