Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Return on Assets (ROA)

Financial Accounting

14. Financial Statement Analysis

Ratios: Return on Assets (ROA)

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Multiple Choice

Which of the following ratios can investors use to evaluate a company's potential earning power?

Inventory Turnover

Current Ratio

Debt-to-Equity Ratio

Return on Assets (ROA)

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Verified step by step guidance

Understand the question: The problem is asking which ratio investors can use to evaluate a company's potential earning power. The correct answer provided is Return on Assets (ROA). Let's break this down step by step.

Step 1: Define 'Return on Assets (ROA)': ROA is a financial ratio that measures how efficiently a company uses its assets to generate profit. It is calculated using the formula:

\frac{Net Income}{Total Assets}

. This ratio is expressed as a percentage.

Step 2: Explain why ROA is relevant: ROA is a key indicator of a company's earning power because it shows how effectively the company is using its assets to generate profits. A higher ROA indicates better performance and efficiency.

Step 3: Compare ROA with the other ratios mentioned: Inventory Turnover measures how efficiently inventory is managed, Current Ratio assesses short-term liquidity, and Debt-to-Equity Ratio evaluates financial leverage. While these are important, they do not directly measure earning power like ROA does.

Step 4: Conclude: Investors use ROA to evaluate a company's potential earning power because it directly links net income to the total assets employed, providing insight into profitability and operational efficiency.