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.
E) Its
Total assets turnover must
Equal the industry average.

Question

Quizplus · Accepted Answer

A firm's ROE can be decomposed into three parts: profit margin, total assets turnover, and equity multiplier (or debt ratio). Since the firm's profit margin and debt ratio are both below the industry average and its ROE is above the industry average, its total assets turnover must be above the industry average to compensate for the low profit margin and debt ratio.

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