Question

5. Link Leisure has an ROE below the industry average, but their profit margin and financial leverage are both above the industry average.

Which of the following statements is true about Link Leisure?

1. Its dividend payout must be equal to the industry average
2. Its total asset turnover must be lower than the industry average
3. Its return on assets must be higher than the industry average
4. Its time interest earned ratio must be below the industry average
   
   

Answer 1

The correct statement is

B. Its total asset turnover must be lower than the industry average

Since the profit margin is higher, but ROE is lower and financial leverage is higher, it means that the Link Leisure has higher assets than industry, but sales are lower since profit margin is higher than the industry.

Total Asset Turnover = Sales/Total Assets

Since sales are lower and total assets are higher, Link leisure's total asset turnover must be lower than the industry average.