Multiple Choice
Which ratio measures the overall return on a firm's assets, taking into account financial leverage and taxes?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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Which of the following is a financial performance measure at an organizational level?
A
Current Ratio
B
Inventory Turnover Ratio
C
Return on Assets (ROA)
D
Accounts Receivable Turnover
Verified step by step guidance1
Understand the concept of financial performance measures: Financial performance measures are metrics used to evaluate how well an organization is utilizing its resources to generate profits and achieve financial goals.
Identify the key financial performance measure in the problem: Return on Assets (ROA) is a financial performance measure that evaluates how efficiently an organization is using its assets to generate profit.
Explain the formula for ROA: The formula for Return on Assets is \( \text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}} \). This ratio provides insight into the profitability relative to the company's total assets.
Compare ROA with other metrics provided: Current Ratio, Inventory Turnover Ratio, and Accounts Receivable Turnover are operational or liquidity measures, not direct indicators of overall financial performance at the organizational level.
Conclude why ROA is the correct answer: ROA is a comprehensive measure of financial performance because it links profitability to the assets used in operations, making it suitable for evaluating organizational-level performance.
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