CFA Level I · CFA Level I Exam · Financial Analysis Techniques
A company's ROA rose over the year, while its net profit margin fell. Holding other factors constant, this combination is most likely explained by:
The most likely explanation is an increase in total asset turnover. ROA is net profit margin multiplied by asset turnover, so a rise in ROA despite a lower margin requires a larger proportional gain in turnover. Leverage does not enter ROA.
- Aa decline in the equity multiplier
- Ban increase in total asset turnoverCorrect
- Ca lower tax burden
Explanation
ROA equals net profit margin times total asset turnover. If margin falls but ROA rises, asset turnover must have risen by proportionally more. The equity multiplier is not part of ROA, and a lower tax burden would reduce margin and ROA together.
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