A company has return on assets of -10%.Return on sales are -5%.The leverage ratio is 2.0.Following DuPont analysis,what is return on equity?
A)-5%
B)-10%
C)-20%
D)-30%

Question

Quizplus · Accepted Answer

According to the DuPont analysis:
ROE = Net Profit Margin (NPM) x Total Asset Turnover (TAT) x Leverage Ratio (LR)

Given:
Return on Assets (ROA) = -10%
Return on Sales (ROS) = -5%
Leverage Ratio (LR) = 2.0

We can calculate NPM as:
NPM = ROS x (1 - LR) = -5% x (1 - 2.0) = 5%

And TAT as:
TAT = Sales/Total Assets = -(ROA)/LR = -(-10%)/2.0 = 5%

Therefore, ROE = NPM x TAT x LR = 5% x 5% x 2.0 = -20%

Hence, the correct answer is C) -20%.

A Company Has Return on Assets of -10