A retail enterprise reports a Net Profit Margin of 12.0%, an Asset Turnover Ratio of 1.50x, and a Financial Leverage Equity Multiplier of 1.80x. Under 3-Step DuPont Analysis, what is the firm's Return on Equity (ROE)?

[ A ]18.00% (Net Profit Margin * Asset Turnover alone: Return on Assets)

[ B ]21.60%

[ C ]32.40% [ Net Margin * Asset Turnover * Equity Multiplier = 0.12 * 1.50 * 1.80 ][ CORRECT ]

[ D ]15.30%

Takeaway

Option C is correct: 32.40% [ Net Margin * Asset Turnover * Equity Multiplier = 0.12 * 1.50 * 1.80 ]

Derivation

The 3-Step DuPont framework decomposes ROE into three independent drivers, each answering a different diagnostic question. Profitability (Net Profit Margin) = 12.0% asks how much profit is squeezed from each rupee of sales. Efficiency (Asset Turnover) = 1.50x asks how many rupees of sales each rupee of assets generates. Leverage (Equity Multiplier) = 1.80x asks how many rupees of assets are financed per rupee of equity. Multiplying all three: ROE = 0.12 × 1.50 × 1.80 = 0.3240, or 32.40%. Stopping after the first two factors gives Return on Assets (18.00%) instead of ROE — the leverage multiplier is what converts asset-level returns into the shareholder-level return, which is exactly the step most often skipped.

Why the others fail

A — 18.00% (Net Profit Margin * Asset Turnover alone: Return on Assets)

Multiplying only Net Margin by Asset Turnover produces Return on Assets, 18.00%; it stops short of applying the Equity Multiplier needed to reach ROE.

B — 21.60%

Does not correspond to correctly multiplying Net Profit Margin, Asset Turnover, and the Equity Multiplier together using the figures given in the question.

D — 15.30%

Understates ROE; multiplying 0.12 by 1.50 by 1.80 correctly yields 32.40%, well above this figure, once all three DuPont components are applied.