Question

11. 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? Its total assets turnover must be below the industry average. Its total assets turnover must be above the industry average. Its TIE ratio must be below the industry average Its total assets turnover must equal the industry average. Its return on assets must equal the industry average.

Answer 1

ROE = Net Income/Equity Funds

Profit Margin = Net Income/Sales

Debt ratio = Debt/Total Assets

If the profit margin is lower than industry average, it means that sales are higher

And debt ratio is lower, it means that major part of assets is financed with equity

Since ROE is above industry average, it means equity is lower

Which means that the total assets of the firm are lower than the industry average

Now, since sales are higher and total assets are lower

Total Assets Turnover ratio = Sales/Total Assets should be higher

Hence, the answer is Its total assets turnover must be above the industry average