The following data is given for two similar companies : A Ltd. B Ltd. Net profit margin 23% 20% Asset turnover ratio 1.25 1.50 Financial Leverage 1.50 1.40 (i) Calculate Return on Equity for A Ltd. and B Ltd. (ii) Which

(i) Calculate Return on Equity for A Ltd. and B Ltd. Return on equity = Net Profit Margin x Asset turnover ratio x Financial Leverage A Ltd. = 23% x 1.25 x 1.50 = 43.13% B Ltd. = 20% x 1.50 x 1.40 = 42.00% (ii) Which company has higher Return on Equity ? A Ltd. has higher Return on equity. (iii) What is the reason for higher return on equity ? A Ltd. has higher net profit margin (Net Profit/Sales) and slightly better financial leverage (Total Assets/Total Equity) as compared to B Ltd.