Question

Which of the following will cause a decrease in a company's return on equity ratio? (Check all that apply.) A) Increase in net income B) Increase in total assets C) Increase in shareholder's equity D) Decrease in net profit margin

Answer 1

D and B.

A company's return on equity (ROE) ratio can decrease if there is a decrease in the net profit margin, as this would result in lower net income, a key component in the ROE formula. Additionally, if there is a significant increase in total assets without a proportionate increase in net income, ROE may also decline, as the denominator of the ROE formula (shareholder's equity) would increase. However, it's important to note that an increase in shareholder's equity and an increase in net income would generally lead to an improvement in ROE. So, while these factors can affect ROE, they may not always result in a decrease, as the impact depends on the relative magnitude of changes.