Firm ABC and Firm XYZ both have ROAs of 12%; however, Firm ABC has a much higher ROE than Firm XYZ. Which of the following do we know to be true? Relative to Firm ABC, Firm XYZ has a lower:
A) debt ratio.
B) total asset turnover ratio.
C) current ratio.
D) net profit margin.

Question

Quizplus · Accepted Answer

Firm XYZ has a lower debt ratio compared to Firm ABC. ROE is influenced by the company's use of leverage; a higher ROE with the same ROA suggests that Firm ABC uses more debt financing, leading to a higher debt ratio.

Firm ABC and Firm XYZ Both Have ROAs of 12%;