What would be indicated if a company’s return on assets was steady but its return on...

Question

Question

What would be indicated if a company’s return on assets was steady but its return on equity increased rapidly?

Answer 1

Answer #1

It would indicate that Equity has decreased or that higher proportion of assets is being financed through debt.

Return on Assets = Net Income/Total Assets

Return on Equity = Net Income/Equity

hence., when return on assets is constant, it means that net income and assets are constant

The reason for increase in ROE has to be decline in equity

Answer 2

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