Practice question · Multiple choice
A firm's ROE rises from 12% to 20% while its ROA is unchanged. What has management actually done?
Hints
- DuPont splits ROE into three factors. Which one can move while ROA stands still?
- Ask what a borrowed euro does to the equity denominator.
Show the answer
B. Increased leverage: the DuPont multiplier rose
Why
ROA unchanged rules out margin and turnover, so the multiplier is the only factor left, and leverage amplifies returns in both directions. The DuPont decomposition exists precisely to make this visible, since 'ROE improved' reads as performance and can be nothing but a bigger loan.
Practise Financial Statement Analysis
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Financial Statement Analysis
- EBIT 450, interest expense 90. Estimate the interest cover ratio.
- Liquidity, solvency, or profitability ratio?
- Match each DuPont component to its formula.
- A firm's ROE is 18% but its ROA is only 6%. The DuPont leverage multiplier must be:
- Which benchmarks make a ratio meaningful?
- A firm reports rising profit and an interest cover falling toward 1. What does that combination indicate?