An analyst is evaluating two companies, A and B. Company A has a debt

An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and
Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B’s debt
level, but not about Company A’s debt level.

Which of the following would best explain this
position?
A) Company B has much higher operating income than Company A.
B) Company B has more total assets than Company A.
C) Company A has a lower times interest earned ratio and thus the analyst is not worried about
the amount of debt.
D) Company B has a higher operating return on assets than Company A, but Company A has a
higher return on equity than Company B.

ANSWER

D