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ProfGear, Inc, makers of the finest pen protectors on the market, has a relatively weak operating...

ProfGear, Inc, makers of the finest pen protectors on the market, has a relatively weak operating profit margin compared to the industry average, but a relatively high pre-tax margin. Which of the following is correct:

Prof Gear has a relatvely high Financial Leverage ratio compared to it's peers

Prof Gear has a relavtively higher Interest Coverage ratio compared to it's peers

Prof Gear likely has a higher Debt to Asset ratio compared to it's peers

Prof Gear has a relatively lower Inventory Turnover ratio compared to it's peers

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Answer #1

Answer :- Option A). Prof Gear has a relatively high Financial Leverage ratio compared to it's peers

Explanation :- Financial leverage is defined as the ability of the firm to use fixed cost of capital to magnify the effect of changes in operating profit or earnings before interest and tax (EBIT). The following formula is applied for the calculation of financial leverage :-

Financial leverage = Operating profit or EBIT / Earnings before tax (EBT).

Accordingly, if the operating profit of firm is less as that of industry average operating profit, but, having relatively high pre tax income (earnings before tax) than that of industry average pre-tax income, then, the financial leverage of firm will be definitely relatively high than that of it's peers in industry.

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