CMA Intermediate · Financial Management and Business Data Analytics · Financial Ratio Analysis
Kaveri Foods Ltd has sales of Rs 12,00,000, net profit of Rs 96,000, total assets of Rs 6,00,000 and shareholders' equity of Rs 4,00,000. Its return on equity is:
ROE is 24%. Net margin is 8%, asset turnover is 2 times and the equity multiplier is 1.5, so the product is 24%. This equals Rs 96,000 divided by equity of Rs 4,00,000. The 16% option is ROA and ignores leverage.
- A16%
- B8%
- C24%Correct
- D12%
Explanation
Net margin = 96,000/12,00,000 = 8%. Asset turnover = 12,00,000/6,00,000 = 2. Equity multiplier = 6,00,000/4,00,000 = 1.5. ROE = 8% x 2 x 1.5 = 24%. Check: 96,000/4,00,000 = 24%. Using 8% x 2 = 16% omits leverage.
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