Profitability and Per-Share Ratios

Question 1

What does ROA measure

Answer 1

how well management is deploying the firm’s assets in the pursuit of profits

Question 2

what does ROE measure

Answer 2

the return per owner dollar invested

Question 3

ROE will always be lower than ROA when there are liabilities. True or false?

Answer 3

False

the difference in the denominators used in ROA and ROE is total liabilities

Question 4

What is the relationship between ROE and ROA

Answer 4

ROA = ROE x (1-debt ratio)

Question 5

What does the sustainable growth rate measure

Answer 5

the potential growth of a firm without borrowing additional funds

Question 6

what is indicated if net sales increase and net income remains the same

Answer 6

net profit margin worsens because more sales are generating the same bottom line

Question 7

What does total asset turnover measure?

Answer 7

the level of capital investment relative to sales volume

Question 8

How is the asset turnover effected if net sales increase?

Answer 8

it improves because more sales are being produced by the same amount of assets

Question 9

What can a change in the gross profit margin indicate

Answer 9

• that the firm has priced its products differently while maintaining the same cost structure
  -the firm has changed the way it controls the costs of production and/or inventory management