SIDC Module 7 Financial statement analysis and ratios question: Alpha's return on equity

SIDC Module 7Financial statement analysis and ratios

Alpha Bhd (RM million): revenue 800; profit before interest and tax 160; profit after tax 105; total assets 1,200; equity 700; non-current borrowings 300. What is Alpha's return on equity?

A 8.8%
B 10.5%
C 13.1%
D 15.0%

Show the answer and explanation

Answer: D. 15.0%

ROE measures the return earned for ordinary shareholders: profit after tax ÷ equity = 105 ÷ 700 = 15.0%. 8.8% is return on total assets (105 ÷ 1,200). 10.5% divides by capital employed (equity plus non-current borrowings, 1,000), which includes lenders' capital. 13.1% is the net profit margin (105 ÷ 800), a return on revenue rather than on equity. Because ROE is measured after interest, gearing lifts it whenever borrowing costs less than the return earned on assets. Source: SIDC M7 Study Outline Topic 3.2 Techniques of Analysis; ACCA technical article 'Ratio analysis' (accaglobal.com): ROE = profit after tax ÷ total equity (as at October 2026).

Common mistake

Dividing by a wider capital base. ROE uses shareholders' equity only, with the profit left for shareholders after interest and tax.

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