Multiple Choice
Return on investment (ROI), specifically Return on Assets (ROA), can be decomposed into which of the following two measures?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which ratio indicates a company's profitability without regard to how its resources are financed?
A
Current Ratio
B
Return on Equity (ROE)
C
Return on Assets (ROA)
D
Debt-to-Equity Ratio
Verified step by step guidance1
Understand the concept of profitability: Profitability measures a company's ability to generate earnings relative to its expenses and other costs during a specific period.
Identify the key ratios provided in the problem: Current Ratio, Return on Equity (ROE), Return on Assets (ROA), and Debt-to-Equity Ratio.
Focus on the definition of Return on Assets (ROA): ROA evaluates how effectively a company uses its assets to generate profit, without considering how those assets are financed. It is calculated as \( \text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \).
Compare ROA with other ratios: Current Ratio measures liquidity, ROE measures profitability relative to shareholders' equity, and Debt-to-Equity Ratio assesses financial leverage. None of these directly measure profitability without regard to financing, unlike ROA.
Conclude that Return on Assets (ROA) is the correct ratio for assessing profitability without regard to how resources are financed.
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