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CA Final · Financial Reporting · Analysis of Financial Statements

Godavari Steel Ltd has net profit margin of 5%, total asset turnover of 2 times and an equity multiplier of 3 (total assets/equity). Equity is Rs 20,00,000. Under the extended DuPont analysis, which combination is correct?

ROE is 30%, sales are Rs 1,20,00,000 and net profit is Rs 6,00,000. DuPont ROE is 5% margin times 2 asset turnover times 3 equity multiplier. Equity of Rs 20,00,000 implies assets of Rs 60,00,000, sales of twice that, and 5% of sales gives the profit.

  1. AROE 30%, sales Rs 1,20,00,000, net profit Rs 6,00,000Correct
  2. BROE 10%, sales Rs 40,00,000, net profit Rs 2,00,000
  3. CROE 30%, sales Rs 60,00,000, net profit Rs 3,00,000
  4. DROE 15%, sales Rs 1,20,00,000, net profit Rs 6,00,000

Explanation

ROE = 5% x 2 x 3 = 30%. Net profit = 30% x 20,00,000 = Rs 6,00,000. Total assets = 20,00,000 x 3 = Rs 60,00,000, so sales = 2 x 60,00,000 = Rs 1,20,00,000. Check: 5% of 1,20,00,000 = Rs 6,00,000. Using equity as the asset base gives the wrong sales of Rs 40,00,000.

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