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    Question

    A company has Net Sales of ₹1,000 lakhs, Net Profit of

    ₹80 lakhs, Total Assets of ₹750 lakhs, and Equity of ₹250 lakhs. Calculate Return on Equity (ROE) using the DuPont formula and identify the major driver of profitability.
    A 16% – driven by net profit margin Correct Answer Incorrect Answer
    B 20% – driven by asset turnover Correct Answer Incorrect Answer
    C 32% – driven by high leverage Correct Answer Incorrect Answer
    D 40% – driven by both margin and turnover Correct Answer Incorrect Answer
    E 25.6% – driven mainly by high profit margin and moderate turnover Correct Answer Incorrect Answer

    Solution

    ROE = (Net Profit / Sales) × (Sales / Assets) × (Assets / Equity) = (80/1000) × (1000/750) × (750/250) = 0.08 × 1.33 × 3 = 31.92  ≈  32% High leverage (2× equity) is the key multiplier → Option C

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