Firms with a lower return on assets (ROA) and higher leverage will have a lower return on equity (ROE) than firms with a higher return on assets (ROA) and lower leverage.

Question

Quizplus · Accepted Answer

The relationship between ROA, leverage, and ROE is not directly determined by the levels of ROA and leverage alone. A firm with a lower ROA but higher leverage can still have a higher ROE if the cost of debt is lower than the ROA, due to the leverage effect.

Firms with a Lower Return on Assets (ROA) and Higher