What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
A)firms have different dividend payout ratios.
B)some firms use fully depreciated assets.
C)financial leverage varies among firms.
D)unprofitable firms will not have any tax liability.

Question

Quizplus · Accepted Answer

ROA is affected by financial leverage, i.e. the use of debt financing. Firms with higher financial leverage will have a higher ROA than firms with lower financial leverage, as long as they generate the same level of net income. Therefore, comparing the ROA of firms with different levels of financial leverage may not be meaningful.

What Is Primarily Responsible for the Potential Distortion Among the ROA