Firm ABC and Firm XYZ both have ROEs of 18%; however, Firm ABC has a much higher ROA than Firm XYZ. Which of the following do we know to be true? Relative to Firm ABC, Firm XYZ has a higher:
A) debt ratio.
B) total asset turnover ratio.
C) current ratio.
D) net profit margin.

Question

Quizplus · Accepted Answer

A higher ROA with the same ROE indicates that Firm ABC uses less leverage, meaning Firm XYZ must have a higher debt ratio.

Firm ABC and Firm XYZ Both Have ROEs of 18%;