Hello all! Here’s a question that I don’t understand. Which of the following would best describe the situation where a company’s net income to total equity is higher than the industry average while the net income to total assets ratio is lower than the industry average? A Net income is higher than the industry average B Debt Ratio is higher than the industry average C Asset Turnover is higher than the industry average I understand that there’s no way it can be A or C, I just don’t know understand why the answer is B? What debt ratio are they referring to? Debt to asset? Debt to equity? I’m not sure what they mean by this. Any thoughts?
Well if you think about the fact that a high NI / Equity ratio must mean low equity, and holding NI constant, a lower NI / Assets ratio means that Assets are higher relative to NI. So low equity, high assets = high debt.
Thanks! I think i’m brain dead at this point… not making the right connections!
intuitively, I had the same reasoning movingonup, but what kinda stops me from that thinking is just because a company has high assets, does not always mean it bought all those assets using debt instruments… correct me if im wrong i guess
@mmike: Total Assets should always be equal to Total Liab+Total Equity. So the only way you can buy an asset while maintaining this equation is to finance it through some liability (usually debt). If its not debt explicitly, it could be a lease (or any other off-balance sheet liability), but you will eventually treat it like debt for analytical purpose. (D/E ratio is higher for Finance Lease).