Suppose Novak Company experienced a reduction in its ROE over the last year.This decrease could be attributed to:
A)an increase in net profit margin.
B)a decrease in asset turnover.
C)an increase in leverage.
D)a decrease in Equity.

Question

Quizplus · Accepted Answer

ROE (Return on Equity) is calculated by multiplying net profit margin by asset turnover and leverage. Since the question specifically mentions a reduction in ROE, we can assume that net profit margin and leverage have stayed constant. Therefore, the only option that could cause a decrease in ROE is a decrease in asset turnover. If asset turnover decreases, it means that the company's sales are not generating as much income as before, leading to a decrease in ROE.

Suppose Novak Company Experienced a Reduction in Its ROE Over