Question

In 2017, Benvolio Enterprises had a return on assets of 15% and a return of equity of 17%; in 2018 those ratios were 15% and 16% respectively, Given this, a reasonable assumption would be that Benvolio:

	A.	increased leverage.
	B.	decreased leverage.
	C.	decreased profitabilty.

Answer 1

Return on equity = Income available to equity/Total equity

Return on assets = Net income/Total assets

The correct option is B. Decline in return on equity implies that there is an increase in equity, keeping profitability constant. Increase in equity leads to decreased leverage. Profitabilityis considered to be constant, because there is no change in return on assets.

Option A is incorrect because none of the ratio indicates decrease in equity or increase in debt which leads to increased leverage.

Option C is incorrect because constant return on asset indicates that there is no change in profitability.