Final answer:
The difference between Return on Assets (ROA) and Return on Equity (ROE) is indicative of the company's use of Debt financing. ROA includes all capital sources, while ROE focuses strictly on equity financing. The presence of debt financing will create a disparity between the two metrics.
Step-by-step explanation:
The difference between Return on Assets (ROA) and Return on Equity (ROE) reflects the use of different types of financing. The correct answer to the question is (b) Debt. ROA measures the efficiency of a company's management in using its assets to generate earnings, taking into account all sources of the company's capital, including debt and equity. In contrast, ROE measures how effectively a company is using equity from its shareholders to generate profits, hence it only considers the equity portion of financing. When a company uses debt to finance its operations, it is obligated to pay interest, which reduces net income and therefore ROA. However, because debt does not dilute equity ownership, the same interest payments do not affect the numerator in ROE, leading to a higher value if leverage (use of debt) increases profitability.