observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average Which of the following statements is CORRECT?
A) Its total assets turnover must equal the industry average.
B) Its total assets turnover must be above the industry average.
C) Its return on assets must equal the industry average.
D) Its TIE ratio must be below the industry average.
E) Its total assets turnover must be below the industry average.

Question

Quizplus · Accepted Answer

The firm's high ROE indicates that it is using its equity efficiently to generate profits. However, its low profit margin suggests that it may not be as profitable as its competitors on a per-dollar basis. Its low debt ratio suggests that it may be less risky than its industry peers. To achieve a high ROE with low profit margins, the firm must have a high total assets turnover ratio, indicating that it is generating more sales per dollar of assets than its competitors. Therefore, its total assets turnover must be above the industry average.

Observe That a Firm's ROE Is Above the Industry Average