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 increase in profit margin indicates that BDS is earning a higher profit on each unit of sales. However, if the asset turnover ratio, which measures how efficiently the company uses its assets to generate revenue, remains constant or decreases, it means that BDS is not using its assets effectively to increase sales. Thus, an unchanged ROA despite an increase in profit margin suggests a decrease in the asset turnover ratio. The other options - A) Leverage ratio, B) Market-to-book ratio, and D) Debt burden - may indirectly affect ROA but are not directly related to the cause of the problem in this scenario.

Assume BDS Acquired Its Main Supplier,ABC