You observe that a firm's ROE is above the industry average,but its profit margin and debt ratio are both below the industry average.Which of the following statements is correct?
A)Its total assets turnover must be above the industry average.
B)Its return on assets must equal the industry average.
C)Its TIE ratio must be below the industry average.
D)Its total assets turnover must be below the industry average.

Question

Quizplus · Accepted Answer

Given that the firm's ROE is above the industry average while its profit margin and debt ratio are below the industry average, the firm must be compensating for these lower metrics with a higher total assets turnover. This is because ROE can be decomposed into profit margin, asset turnover, and financial leverage. A lower profit margin and lower debt ratio (implying lower financial leverage) would necessitate a higher asset turnover to achieve a higher ROE.

You Observe That a Firm's ROE Is Above the Industry