Which of the following would best explain a situation where the ratio of net income/total equity of a firm is higher than the industry average, while the ratio of net income/total assets is lower than the industry average?

A) The firm's net profit margin is higher than the industry average.
B) The firm's asset turnover is higher than the industry average.
C) The firm's equity multiplier must be lower than the industry average.
D) The firm's debt ratio is higher than the industry average.
E) None of the options are correct.

Question

Muneeb Abbas · Accepted Answer

Final Answer : D, Explanation :  The firm having a higher net income/total equity ratio than the industry average while having a lower net income/total assets ratio suggests that the firm is using more debt in its capital structure. This is because the equity multiplier (total assets/total equity) is higher, indicating a higher proportion of assets financed by debt. This does not directly relate to the firm's net profit margin or asset turnover but rather to its financial leverage, which is why option D is correct.

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