Description
Between December 31, 2016 and December 31, 2017, ROE at Qupid Industries decreased even though sales increased. Using the DuPont Identity, explain what else could have happened to cause this.
Explanation & Answer
2 The factors which has an impact on ROE is the net profit margin, the total assets turnover and the equity multiplier. It is possible that the net profit margin would have gone down despite of increase in sales. The another reason may be the assets turnover would have gone down despite of sales as the increase in total assets would be larger than increase in sales. The third reason may be the equity multiplier, the increase in assets would have been financed by debt instead of equity therefore the equity multiplier would have gone down, these factors or any one of them might have decreased the ROE despite of increase in sales.
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