Question

You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT? Its total assets turnover must equal the industry average. Its total assets turnover must be above the industry average. Its return on assets must equal the industry average. Its TIE ratio must be below the industry average. Its total assets turnover must be below the industry average. 1

Answer 1

Its return on assets must equal the industry average.

Answer: Option 3.

Explanation:

ROE increases with the increase in the debt ratio. If a firm's debt ratio is lower than the industry average, then the result of this would be its ROE to fall also below industry average, all else the same.

But since its ROE is above industry average, it means that all else is not the same. Talking in a particular context, its return on assets must be above industry average to compensate for the below industry debt ratio.