An analyst is evaluating two companies, A and B. company A has a debt ratio of 5
ID: 2756912 • Letter: A
Question
An analyst is evaluating two companies, A and B. company A has a debt ratio of 50% & Company B has a debt ratio of 25% in this report the analyst is concerned about company B debt level but not about company A debt level. which of the following will best explain this position ?
company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
Company B has much higher operating income that company A.
company B has higher operating return on assets than company A, but company A has a much higher return on equity than company B.
company B has more total assets than company A.
Explanation / Answer
C. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B
The lower ROE results from the higher charges