The following figures are extracted from the balance sheet of Swadesha Ltd. Net profit after tax = Rs.2,00,000, Net profit before tax = Rs.2,80,000, Total Investment (Owned + Borrowed) = Rs.4,00,000, Own funds = Rs.1,00,000. Calculate Return on Investment and Return on Equity for Swadesha Ltd.

Question

Accepted Answer

Given: Net Profit After Tax (NPAT) = ₹2,00,000, Net Profit Before Tax (NPBT) = ₹2,80,000, Total Investment (Owned + Borrowed) = ₹4,00,000, Own Funds (Equity) = ₹1,00,000.

**Return on Investment (ROI):**
ROI = (Net Profit After Tax / Total Capital Invested) × 100
ROI = (2,00,000 / 4,00,000) × 100
ROI = 50%

**Return on Equity (ROE):**
ROE = (Net Profit After Tax / Own Funds) × 100
ROE = (2,00,000 / 1,00,000) × 100
ROE = 200%

The ROI is 50% and the ROE is 200%. The high ROE compared to ROI indicates that the company is effectively using borrowed funds to enhance returns for equity holders.