CMA Final · Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis
Kaveri Textiles Ltd has a net profit margin of 6%, total asset turnover of 2.5 times, and an equity multiplier (total assets / equity) of 1.6. Using the DuPont analysis, what is its return on equity (ROE)?
Under the three-step DuPont model, ROE equals net profit margin times asset turnover times equity multiplier. That is 6% x 2.5 x 1.6, giving 24%. The 15% figure is only return on assets and ignores the effect of financial leverage on shareholders' returns.
- A24%Correct
- B15%
- C9.6%
- D38.4%
Explanation
ROE = net profit margin x asset turnover x equity multiplier = 6% x 2.5 x 1.6 = 24%. Check: ROA = 6% x 2.5 = 15%; 15% x 1.6 = 24%. The 15% option stops at ROA and omits leverage, while 9.6% multiplies margin by leverage and skips asset turnover.
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