What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
A) Firms have different dividend payout ratios.
B) Some firms use fully depreciated assets.
C) Financial leverage varies among firms.
D) Unprofitable firms will not have any tax liability.

Question

Quizplus · Accepted Answer

Financial leverage, which is the use of debt financing, can vary among firms and can result in differences in ROA even if net income is used in the numerator. This is because firms with higher financial leverage will have a lower equity base, which will result in a higher ROA even if their net income is similar to firms with lower financial leverage. Therefore, financial leverage is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator.

What Is Primarily Responsible for the Potential Distortion Among the ROA