Question

The ratio of Total Loans / Total Assets is one measure of the a firm's 'Asset...

The ratio of Total Loans / Total Assets is one measure of the a firm's 'Asset / Liability Management which also impacts the profitability of a firm in the following way:

Question 2 options:

All other factors held constant, the greater the ratio of Total Loans / Total Assets, the greater a firm's earnings and profitability will be.

All other factors held constant, the greater the ratio of Total Loans / Total Assets, the smaller a firm's earnings and profitabilitiy will be.

The ratio of Total Loans / Total Assets has little impact on a firm's earnings and profitability.
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Answer #1

The greater the total loans to total assets, the larger will be the interest payments on debt. This affects the profitability as the net profit dips on larger interest outgo. Thus, all other factors held constant, if the ratio of total loans to total assest rises, the firms earnings and profitability would be smaller.

Answer is All other factors held constant, the greater the ratio of Total Loans / Total Assets, the smaller a firm's earnings and profitabilitiy will be.

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