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**CFA Practice Question**

An analyst applied the DuPont System to the following data for a company:

- Equity turnover 4.0
- Net profit margin 5.8%
- Total asset turnover 1.8
- Dividend payout ratio 27.8%

The company's return on equity is closest to ______.

A. 43.2%.

B. 15.4%.

C. 23.2%.

**Explanation:**ROE = Equity turnover x Net profit margin = 4.0 x 5.8% = 23.2%

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**User Contributed Comments**
10

User |
Comment |
---|---|

parry89 |
whatttt... i thought ROE = net profit margin x asset turnover x equity turnover?? |

pepper |
equity turnover = annual sales divided by its average stockholders' equity, so ROE = (net income / net sales) x (net sales / total assets) x (total assets / common equity) = (net profit margin) x (equity turnover). |

kellyyang |
wow, I almost forgot this formula. |

cjpatel |
so where did the ASSET turnover go??? |

jerasmus |
I was caught out here as well... As I understand it ROE = net profit margin x asset turnover x leverage. with equity turnover = asset turnover x leverage. Does this make sense? |

dini85 |
don't know whether this method correct (4.0/1.8) * 0.058 * 1.8 = 0.232 |

erinelize |
Ok so the equity turnover includes both TAT and leverage then. Thanks jerasmus! |

bidisha |
It's equity turnover NOT equity multilpier |

berns23 |
Good one |

santibanez |
Jerasmus is right ROE=net profit margin Ã |