Companies HD and LD are both profitable, and they have the same total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). Company HD has the higher total debt to total capital ratio. Both firms finance using only debt and common equity. Which of the following statements is CORRECT?
A) Company HD has a higher assets turnover than company LD
B) Company HD has a higher return on equity than company LD
C) None of the other statements are correct because the information provided on the question is not enough
D) Company HD has lower total assets turnover than company LD
E) Company HD has a lower operating income (EBIT) than company LD
Answer:
Option B .Company HD has a higher ROE than Company LD
Explanation:
Company HD has a higher debt ratio which is part of the parameters for calculating ROE(return of equity) which is the measure of financial performance and is calculated by dividing net income by share holders equity(calculated by minusing companies debt from companies assets.)