Question

Assume you are a sell-side analyst and you cover the widget industry. In 2018, Big Widget Company decided to double manufacturing capacity by issuing debt in order to capitalize on the growing demand for widgets. Assume that the company was able to realize scale economies through increased buying power. Any benefit from these scale economies was offset by borrowing money at a much higher interest rate than existing long term debt. Using 5-Stage DuPont ROE formula, which of the following would be least likely:

1. In 2018, NI / EBT (or the tax burden ratio) was almost the same as it was in 2017

2. In 2018, EBT / EBIT (or the interest burden ratio) was higher than it was in 2017

3. In 2018, EBIT / Sales (or the operating margin) was higher as it was in 2017

4. In 2018, Sales / TA (or total asset turnover ratio) was higher than it was in 2017

5. In 2018, ROE was almost the same as it was in 2017

Answer 1