Suppose Novak Company experienced a reduction in its ROE over the last year.This fall could be attributed to:
A)an increase in net profit margin.
B)a decrease in asset turnover.
C)an increase in leverage.
D)a decrease in Equity.

Question

Quizplus · Accepted Answer

ROE (return on equity) is calculated as net profit margin multiplied by asset turnover multiplied by leverage. If the ROE has decreased, either the net profit margin or asset turnover or leverage or a combination of these factors must have decreased. However, if there was an increase in net profit margin or leverage or a decrease in equity, it would result in an increase in ROE, which contradicts the given scenario. Therefore, the only possible explanation is a decrease in asset turnover, leading to a decrease in ROE.

Suppose Novak Company Experienced a Reduction in Its ROE Over