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CA Final · Financial Reporting · Analysis of Financial Statements

Himalaya Pharma Ltd: net profit margin 5%, total asset turnover 2 times, and equity multiplier (total assets / equity) 2.5. Under the DuPont analysis, with total assets of Rs 40,00,000, what are the net profit and the equity?

Net profit is Rs 4,00,000 and equity is Rs 16,00,000. Asset turnover of 2 on assets of Rs 40,00,000 gives sales of Rs 80,00,000, and 5% of that is Rs 4,00,000. Equity is assets divided by the multiplier 2.5, which is Rs 16,00,000, giving ROE of 25%.

  1. ANet profit Rs 4,00,000; equity Rs 16,00,000Correct
  2. BNet profit Rs 2,00,000; equity Rs 16,00,000
  3. CNet profit Rs 4,00,000; equity Rs 10,00,000
  4. DNet profit Rs 8,00,000; equity Rs 16,00,000

Explanation

Sales = 2 x 40,00,000 = 80,00,000. Net profit = 5% x 80,00,000 = 4,00,000. Equity = 40,00,000/2.5 = 16,00,000. ROE = 25%, matching 5% x 2 x 2.5. Option with Rs 2,00,000 applies the margin to assets instead of sales.

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