- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 22. Understanding Balance Sheets
- Subject 5. Uses and Analysis of the Balance Sheet
CFA Practice Question
Which one of the following would best explain a situation where the ratio of net income to total equity for a firm is higher than the industry average while the ratio of net income to total assets is lower than the industry average?
A. Net profit margin is higher than the industry average.
B. Debt ratio is higher than the industry average.
C. Asset turnover is higher than the industry average or the equity multiplier is lower than the industry average.
User Contributed Comments 6
| User | Comment |
|---|---|
| kalps | If debt is higher then net income to to total equity will be higher becos less equity finance If debt is higher then TOTAL assets will be lower becos of the debt and therefore net income to total assets will be lower |
| araggl | if debt is higher then total assets will be higher because of debt and therefore net income to total assets will be lower |
| sarath | Total equity means ...without debt here.... Also as debt increases ==>> assets will also increase to balanace the accounting equation... |
| treakj | Simply because Equity multiplier is Asset/Equity. Therefore if Debt/Asset is higher, then Asset/Equity is also higher |
| danrow | I think the idea is A=OWE+L. IF E is low, it must be that L is high |
| hoyleng | thanks danrow.! |