The Return on Assets ratio is most vulnerable to misinterpretation because:
A) a company may have owned many of their fixed assets for a very long period of time.
B) accounting for revenue recognition is very conservative.
C) current assets are not included in the calculation.
D) it is based on earnings before interest and taxes and tends to overstate earnings.

Question

Quizplus · Accepted Answer

The Return on Assets (ROA) ratio can be misleading if a company has owned many of their fixed assets for a long period of time because the book value of these assets may be significantly depreciated, thus reducing the denominator of the ROA ratio and potentially overstating the company's efficiency in using its assets to generate earnings.

The Return on Assets Ratio Is Most Vulnerable to Misinterpretation