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CA Final · Financial Reporting · Analysis of Financial Statements

Mehta Auto Ltd has: Profit after tax Rs 90 crore, Revenue Rs 1,500 crore, average total assets Rs 900 crore, average shareholders' equity Rs 450 crore. Using the DuPont three-step decomposition, what is the return on equity and which combination of components produces it?

ROE is 20%, made up of net margin 6%, asset turnover 1.667 times and equity multiplier 2.0. Net margin is 90/1500, turnover is 1500/900, and leverage is 900/450. Their product equals PAT divided by average equity, which is 90/450 = 20%.

  1. A20% = net margin 6% x asset turnover 1.667 x equity multiplier 2.0Correct
  2. B20% = net margin 6% x asset turnover 0.6 x equity multiplier 2.0
  3. C10% = net margin 6% x asset turnover 1.667 x equity multiplier 1.0
  4. D12% = net margin 6% x asset turnover 1.667 x equity multiplier 1.2

Explanation

Net margin = 90/1500 = 6%. Asset turnover = 1500/900 = 1.667. Equity multiplier = 900/450 = 2.0. Product = 0.06 x 1.667 x 2 = 20%, matching 90/450. Option 2 inverts asset turnover, which would not give 20%.

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