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

Mehta Ltd has sales of Rs 20,00,000, net profit margin of 6%, total assets of Rs 10,00,000 and equity of Rs 4,00,000. Using the DuPont approach, what is its return on equity?

Return on equity is 30%. Net profit margin of 6% times asset turnover of 2 gives ROA of 12%, and multiplying by the equity multiplier of 2.5 gives 30%. This agrees with net profit of Rs 1,20,000 divided by equity of Rs 4,00,000.

  1. A12%
  2. B30%Correct
  3. C6%
  4. D20%

Explanation

Net profit = 6% x 20,00,000 = 1,20,000. Asset turnover = 20,00,000/10,00,000 = 2. Equity multiplier = 10,00,000/4,00,000 = 2.5. ROE = 6% x 2 x 2.5 = 30%. Check: 1,20,000/4,00,000 = 30%. 12% is ROA, ignoring leverage.

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