If an increase in ROA is the result of borrowing at high interest rates, investors could well interpret negative leverage as reflecting good news.

Question

Quizplus · Accepted Answer

Negative leverage means that the company is relying less on debt and more on equity to finance its operations. This could be perceived positively as it reduces financial risk and increases stability. However, an increase in ROA resulting from borrowing at high interest rates means that the company's profitability is dependent on debt financing, which is risky and unsustainable in the long-term. Therefore, investors would not interpret negative leverage resulting from reduced borrowing as good news in this context.

If an Increase in ROA Is the Result of Borrowing