in recent years, Dixie co has greatly increased its return on equity. At the sam
ID: 2803110 • Letter: I
Question
in recent years, Dixie co has greatly increased its return on equity. At the same time, the return on assets has fallen. What has happend? What can you say about Dixie’s operating performance and financial status? in recent years, Dixie co has greatly increased its return on equity. At the same time, the return on assets has fallen. What has happend? What can you say about Dixie’s operating performance and financial status? in recent years, Dixie co has greatly increased its return on equity. At the same time, the return on assets has fallen. What has happend? What can you say about Dixie’s operating performance and financial status?Explanation / Answer
Now,
Return on assets = Net income/Total Assets
Return on Equity = Net income/Total Equity
Now, return on Equity has increased and return on assets has fallen. So, that means that the net percentage of equity has decreased in the total assets. It means that company has issued additional debt.
Regarding the operating performance, it seems from ROA that the operating performance has declined but it will depend upon the interest being paid and the net income. So, the net financial income may have decreased because of interest payments but the operating income is likely to increase.
Because of debt, the cost of capital would have fallen and hence good financial performance.
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