Answer:
d) XYZ company is highly debt financed relative to ABC
Explanation:
The difference between the return on equity ( ROE) and return on assets (ROA) is the structure of capital financing.
ROE is calculated as follows
ROE = net income / shareholders equity. Shareholders' equity is the difference between a business's assets and liabilities. I.e., shareholders equity = Assets - Liabilities.
ROE considers the debts of the business. If a company is highly indebted, its ROE will be high.
ROA is calculated: ROA = net income/ total assets. Total assets is the sum of shareholders' equity plus liabilities. i.e., total assets = assets + liabilities.
The difference is the two ratios is the denominator. If the denominator is small, the ratio will be bigger. A business with a high level of debt will have reduced equity( assets- liabilities).
XYZ Company's return on equity is greater than ABC's, implying that XYZ has more debts than ABC.
