An analyst is evaluating two companies,A and B.Company A has a debt ratio of 50% and Company B has a debt ratio of 25%.In his report,the analyst is concerned about Company B's debt level,but not about Company A's debt level.Which of the following would best explain this position?
A) Company B has much higher operating income than Company A.
B) Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
C) Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
D) Company B has more total assets than Company A.

Question

Quizplus · Accepted Answer

C) Company B having a higher operating return on assets but Company A having a higher return on equity could explain the analyst's position. This suggests that Company A is using its debt more effectively to generate returns for equity holders, making its higher debt level less concerning.

An Analyst Is Evaluating Two Companies,A and B