IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information
Gomti Engineering has profit after tax of Rs 36 crore, revenue of Rs 600 crore, total assets of Rs 400 crore and shareholders' equity of Rs 200 crore. Using the DuPont decomposition, what is its return on equity?
Return on equity is 18%. The net margin is 6%, asset turnover is 1.5 times and the equity multiplier is 2, so the product is 18%. This matches profit after tax of Rs 36 crore divided by equity of Rs 200 crore.
- A18%Correct
- B9%
- C6%
- D12%
- 36%
Explanation
Net margin = 36/600 = 6%. Asset turnover = 600/400 = 1.5. Equity multiplier = 400/200 = 2. ROE = 6% x 1.5 x 2 = 18%, which also equals 36/200. Option B omits the leverage multiplier (6% x 1.5 = 9%).
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