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 equal the industry average.
B) Its total assets turnover must be above the industry average.
C) Its return on assets must equal the industry average.
D) Its TIE ratio must be below the industry average.
E) Its total assets turnover must be below the industry average.

Question

Quizplus · Accepted Answer

If a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average, it means that the firm is generating more return on the same level of assets than the average firm in the industry. Therefore, its total assets turnover must be above the industry average to achieve a higher ROE. The other options do not necessarily have to be true in this situation.

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