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

Meera Industries has sales of ₹50,00,000, net profit margin 8%, total assets turnover 2 times (on total assets) and equity multiplier 2.5. Using the DuPont identity, what is its Return on Equity?

ROE is 40%. Under the DuPont identity it equals net profit margin 8% times asset turnover 2 times times equity multiplier 2.5. Cross-check: profit ₹4,00,000 on equity ₹10,00,000 gives 40%. Stopping at 16% would be return on assets only.

  1. A40%Correct
  2. B20%
  3. C16%
  4. D8%

Explanation

ROE = net margin × asset turnover × equity multiplier = 8% × 2 × 2.5 = 40%. Check: net profit = 4,00,000; total assets = 25,00,000; equity = 25,00,000/2.5 = 10,00,000; ROE = 4,00,000/10,00,000 = 40%. Omitting the equity multiplier gives ROA of 16%, which is wrong.

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