ABC Company's return on asset is greater than XYZ Company's return on asset, but XYZ Company's return on equity is greaten than ABC Company's return on equity, then which of the
following is necessarily true?
a) ABC Company's net profit margin is greater than XYZ' net profit margin
b) XYZ's total asset turn over is greater than ABC Company's total asset turn over
c) The equity multiplier of ABC is greater than XYZ
d) XYZ company is highly debt financed relative to ABC
e) All

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.

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