1. Which is a more meaningful measure of profitability for a firm, Return on Assets or Return on Equity? Why?
3. Why is the buyer's operating cycle considered to be an appropriate upper limit for the credit period? Define what is the operating cycle. Wouldn't the buyer's inventory period be a better target?
1. Return on Equity measures the return generated on the money invested by the equity holders. When we are talking about a firm as a whole, the capital invested would be by the debt holders and the equity holders. This total capital is represented by the Total Assets of the firm, since Total Assets is equal to the Total Liabilities. Therefore profitability of the firm would be measured by the total capital employed by the firm which is equal to the total assets of the firm and a more ...
The solution explains the best measure for profitability, the factors affecting annuity and the a discussion on operating cycle