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Difference in return on equity for two companies

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Last year Barden Homes and Fowler Construction earned $1 million in net income. Both companies have assets of $10 million. Barden generated a return on equity of 11.1%, whereas Fowler produced a return on equity of 20.0%. What can explain the differences in return on equity between the two companies?

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Solution Summary

The solution explains the reason by return on equity may be different for two companies.

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The difference is on account of level of debt and equity. Both the companies have $10 million in assets. Therefore there will be $10 million on the liabilities side. The liabilities side is composed to debt ...

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