Skip to content

CA Final · Financial Reporting · Analysis of Financial Statements

Sahyadri Foods Ltd has sales Rs 20,00,000, net profit margin 6%, total assets turnover 2 times on closing total assets, and equity multiplier 2.5. Using the DuPont identity, what is the return on equity?

Return on equity is 30%. Under the DuPont identity, multiply net margin of 6%, asset turnover of 2 times and equity multiplier of 2.5, giving 0.30. Stopping at 12% would only give return on assets, ignoring leverage.

  1. A30%Correct
  2. B24%
  3. C12%
  4. D15%

Explanation

ROE = margin x asset turnover x equity multiplier = 0.06 x 2 x 2.5 = 0.30, i.e. 30%. Dropping the equity multiplier gives 12%, which is return on assets and is wrong here.

Did you get it right without looking?

One question tells you little. A timed set on Analysis of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Analysis of Financial StatementsFree diagnostic mock

More Analysis of Financial Statements questions