Using the DuPont system of analysis and holding other factors constant, decrease in total asset turnover will result in ________ in the return on equity.
A) an increase
B) a decrease
C) no change
D) an undetermined change

Question

Quizplus · Accepted Answer

According to the DuPont system of analysis, return on equity (ROE) is calculated by multiplying net profit margin (NPM) and total asset turnover (TAT). If TAT decreases while other factors remain constant, the overall ROE will decrease. This is because TAT measures how efficiently a company is using its assets to generate revenue, and a decrease in TAT indicates that the company is generating less revenue for each dollar of assets. Therefore, the best choice is B.

Using the DuPont System of Analysis and Holding Other Factors