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

Meera Industries has a net profit margin of 5%, total asset turnover of 2 times, and a total assets to equity ratio (equity multiplier) of 1.6. Total assets are Rs 50,00,000. Using the DuPont analysis, what is the net profit (in Rs) earned by the company and its Return on Equity?

Net profit is Rs 5,00,000 and ROE is 16%. Sales are 2 times Rs 50,00,000, which is Rs 1 crore, and 5% of that is Rs 5,00,000. DuPont ROE equals margin 5% times turnover 2 times equity multiplier 1.6, giving 16%.

  1. ANet profit Rs 5,00,000; ROE 16%Correct
  2. BNet profit Rs 2,50,000; ROE 8%
  3. CNet profit Rs 5,00,000; ROE 10%
  4. DNet profit Rs 2,50,000; ROE 16%

Explanation

Sales = asset turnover × total assets = 2 × 50,00,000 = 1,00,00,000. Net profit = 5% × 1,00,00,000 = 5,00,000. ROE = 5% × 2 × 1.6 = 16%. Check: equity = 50,00,000 ÷ 1.6 = 31,25,000 and 5,00,000 ÷ 31,25,000 = 16%. Rs 2,50,000 results from wrongly taking sales as Rs 50,00,000, and 10% is ROA ignoring leverage.

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