Financial Analysis Techniques: practice question

Financial Statement Analysis · Financial Analysis Techniques · Question ID fsa1-9

Sutton Analytics gathers the following for Valemont Industries: net income of $90, revenue of $1,500, average total assets of $1,000, and average shareholders' equity of $600. Using the three-component DuPont approach, Valemont's return on equity is closest to:

9.0%
6.0%
15.0%

Show answer and explanation

Correct answer: C

Working: Net profit margin = 90 / 1,500 = 6.0%; asset turnover = 1,500 / 1,000 = 1.5; equity multiplier = 1,000 / 600 = 1.667. ROE = 6.0% x 1.5 x 1.667 = 15.0% (check: 90 / 600 = 15.0%).

Explanation: The DuPont decomposition multiplies margin, turnover, and leverage, and the product equals ROE of 15.0%, which cross-checks against net income over average equity ($90 / $600). 9.0% is return on assets ($90 / $1,000), and 6.0% is only the net profit margin, omitting turnover and leverage.

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Financial Analysis Techniques: practice question

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