As per Du Pont equation for ROE, other things remaining constant, which of the following statements is false?

A. An increase in the net profit margin will increase the ROE.
B. A decrease in debt to asset ratio will increase the ROE.
C. A decrease in return on assets will decrease the ROE.
D. An increase in the average asset turnover will increase the ROE.
E. An increase in equity multiplier will increase the ROE.

Choose the correct answer from the options given below:

Correct option is A

The DuPont Analysis breaks down Return on Equity (ROE) into three components:

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier

Or

This means ROE is influenced by:

• Net Profit Margin – a measure of profitability

• Asset Turnover – a measure of efficiency

• Equity Multiplier – a measure of leverage (i.e., financial structure)

Now, let’s evaluate the statements:

• A. An increase in the net profit margin will increase the ROE.
  True. Higher profitability increases the first component of DuPont, boosting ROE.

• B. A decrease in debt to asset ratio will increase the ROE.
  False. A decrease in debt reduces financial leverage, i.e., the equity multiplier (Assets/Equity), which in turn lowers ROE, not increases it. Hence, this is the false statement.

• C. A decrease in return on assets will decrease the ROE.
  True. ROE is influenced by both profitability and efficiency (ROA = Net Profit Margin × Asset Turnover), so lower ROA reduces ROE.

• D. An increase in the average asset turnover will increase the ROE.
  True. Higher asset turnover means better efficiency in using assets to generate revenue, increasing ROE.

• E. An increase in equity multiplier will increase the ROE.
  True. More leverage (more assets funded by debt) increases the equity multiplier, and thus ROE (assuming positive profits).

Information Booster:

• DuPont analysis helps break down why ROE is high or low – via profitability, efficiency, or leverage.

• The equity multiplier shows how much of assets are financed through equity vs. debt.

• A high equity multiplier indicates higher financial leverage, increasing ROE – but also increases financial risk.

• ROE is a key measure for shareholder return – but should be analyzed in context, especially if driven by high leverage.

• DuPont helps identify performance improvement areas – e.g., a low ROE due to weak margins vs poor asset turnover.

• Increasing debt (i.e., higher D/A ratio) raises equity multiplier, which increases ROE.

• But excessive leverage can harm solvency and increase default risk.

Additional Knowledge:

​B. A decrease in debt to asset ratio will increase the ROE: Debt-to-asset ratio is inversely related to equity content. When D/A falls, the equity component increases, lowering the equity multiplier (Assets/Equity). This reduces the third component of the DuPont formula, hence reducing ROE.​