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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Kiran Ltd has a net profit margin of 5%, total asset turnover of 2 times, and an equity multiplier (total assets / equity) of 2.5. Using the DuPont analysis, what is the return on equity?

Return on equity is 25%. Under DuPont analysis, ROE equals net profit margin times asset turnover times equity multiplier, which is 5% times 2 times 2.5. The 10% option is only return on assets, since it ignores financial leverage.

  1. A10%
  2. B12.5%
  3. C25%Correct
  4. D20%

Explanation

ROE = net profit margin x asset turnover x equity multiplier = 5% x 2 x 2.5 = 25%. ROA is 10%, so choosing 10% ignores the leverage multiplier. 12.5% uses 5% x 2.5 and omits asset turnover.

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