Question

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.

Answer 1

Answer:

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.

Explanation:

The B company has a minor debt ratio compared with company A. Which according to the following formula, permits to conclude it has a higher operating return.

Return on equity = Debt Ratio - Total Liabilities / Total Assets.