Question

1. How can a company improve each ratio? Make sure to discuss how changes in either the numerator or denominator can improve the ratio. For each ratio, do you think it is “better” to focus on improving the numerator or denominator?
   • Return on equity:
   • Profit margin ratio:
   • Asset turnover ratio:
   • Financial leverage ratio

Answer 1

Ratio	How to improve ratio	focus on numerator or denominator (be specific)
Return on equity	Increasing the net income	Return on equity has net income in the numerator ,hence numerator has to be focused on.
Profit margin ratio	Increase the revenues and cut down on expenses	The focus here on the numerator since net income is in the numerator in the profit margin ratio. This is because net income will increase the profit margin than revenues.
Asset turnover ratio	By using the assets more efficiently to improve turnover.	The focus is on the numerator here since higher the turnover the more times will be the asset turnover ratio.
Financial leverage ratio	The debt must be reduced so as to reduce the financial leverage ratio.	The focus is on the numerator since the debt has to be reduced to have minimum leverage.