If a firm has any long-term debt then its ROE will exceed its ROA.

Question

Quizplus · Accepted Answer

This statement is true because ROE or Return on Equity is calculated by dividing net income by equity. When a firm has long-term debt, the equity is reduced by the amount of debt, which means the denominator is lower. This results in a higher ROE as compared to ROA (Return on Assets) which only takes into account the profitability of a firm's assets without factoring in the debt.

If a Firm Has Any Long-Term Debt Then Its ROE