Answer to Question #230394 in Economics for Zannath

Question

b. Firm A has a Return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total debt ratio (D/V) equal to 0.8. Firm A has an asset turnover ratio of 0.9, while firm B has an asset turnover ratio equal to 0.4. Analyze the information.

Answer 1

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. ROEs of 15–20% are generally considered good.

So, firm A has better ROE.

The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. In general, many investors look for a company to have a debt ratio between 0.3 and 0.6.

So, both companies have too high debt ratio.

The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales.  to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.

So, firm A has better asset turnover ratio and as a result better overall activity.