Question

This year Andrews achieved an ROE of 4.7%. Suppose management takes measures that decrease Asset turnover (Sales/Total Assets) next year. Assuming Sales, Profits, and financial leverage remain the same, what effect would you expect this action to have on Andrews's ROE?

Answer 1

ROE will decreases

Step-by-step explanation:

We know that ROE is given by

ROE = Profit Margin (Profit/Sales) ×Total Asset Turnover (Sales/Assets) ×Equity Multiplier (Assets/Equity)

It is given that total Asset Turnover (Sales/Assets) decline keeping other things constant

As the ROE is directly related to the total asset turnover so ROE will also decreases