Assume BDS acquired its main supplier, ABC.As a result of the acquisition, BDS finds that its profit margin increased but its ROA remained constant.A decrease in which one of these ratios is most apt to be the reason why the ROA did not increase with the increase in the profit margin?
A)leverage ratio
B)market-to-book ratio
C)asset turnover
D)debt burden

Question

Quizplus · Accepted Answer

The asset turnover ratio measures how efficiently a company is using its assets to generate revenue. If BDS's profit margin increased but its ROA remained constant, it suggests that the increase in profit was due to a decrease in costs associated with the acquisition. However, if the asset turnover ratio decreased, it means that BDS is not using its assets as efficiently to generate revenue as it was before the acquisition, resulting in a constant ROA despite the increase in profit margin. Therefore, a decrease in asset turnover ratio is the most likely reason why the ROA did not increase with the increase in profit margin.

Assume BDS Acquired Its Main Supplier, ABC