CA Final · Financial Reporting · Analysis of Financial Statements
Mehta Foods Ltd has net profit after tax Rs 9,00,000, sales Rs 90,00,000, average total assets Rs 60,00,000 and average shareholders' equity Rs 30,00,000. Using the three-step DuPont analysis, what is the return on equity?
ROE is 30%. Net margin of 10% times asset turnover of 1.5 times equity multiplier of 2 gives 30%, which matches profit of Rs 9,00,000 divided by average equity of Rs 30,00,000. Ignoring leverage would give only 15%, the return on assets.
- A10%
- B15%
- C30%Correct
- D45%
Explanation
Net margin = 9/90 = 10%. Asset turnover = 90/60 = 1.5. Equity multiplier = 60/30 = 2. ROE = 10% x 1.5 x 2 = 30%. Check: 9,00,000/30,00,000 = 30%. Omitting the leverage multiplier gives 15%, which is ROA.
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