Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?
A)The firm's net profit margin is higher than the industry average.
B)The firm's asset turnover is higher than the industry average.
C)The firm's equity multiplier must be lower than the industry average.
D)The firm's debt ratio is higher than the industry average.

Question

Quizplus · Accepted Answer

The firm having a higher net income/total equity ratio than the industry average while having a lower net income/total assets ratio suggests that the firm is using more debt in its capital structure. A higher debt ratio (total liabilities/total assets) means the firm has a higher proportion of debt relative to its assets, which can increase the net income/total equity ratio due to leverage but may not necessarily improve the net income/total assets ratio if the assets are not generating income efficiently.

Which of the Following Would Best Explain a Situation Where