Question

This year achieved an ROE of. Suppose management takes measures that decrease Asset turnover (Sales/Total Assets) next year. Assuming Sales, Profits, and financial leverage remain the same, what effect would you expect this action to have on Andrews's ROE

Answer 1

Answer:

C) Andrews ROE will decrease.

Explanation:

This year Andrews achieved an ROE of 5.5%. Suppose management takes measures that decrease Asset turnover (Sales/Total Assets) next year. Assuming Sales, Profits, and financial leverage remain the same, what effect would you expect this action to have on Andrews's ROE? A) Andrews ROE will remain the same; B) Andrews ROE will increase; C) Andrews ROE will decrease.

Return on equity is an example of a profitability ratio.

Profitability ratios measure the ability of a firm to generate profits from its asset

Using the Dupont formula, ROE can be determined using :

ROE = Net profit margin x asset turnover x financial leverage

ROE = (Net income / Sales) x (Sales/Total Assets) x (total asset / common equity)

If net profit margin and financial leverage remain the same and asset turnover is reduced, ROE would reduce