Which of the following statements about company analysis is INCORRECT?

Question

a. g = ROE x ( 1 – payout ratio)

b. what matters is the future expected growth rate, not the actual historical growth rate

c. leverage = stockholders’ equity / total assets

d. EBIT / Sales is a measure of the pretax, pre-interest profit margin

Answer 1

Definition of The Leverage Ratio: The meaning of the leverage ratio differs by context. Often: the ratio of debts to total assets. Can also be the ratio of debts (or long-term debts in particular, excluding for example accounts payable) to equity. Whatever, debts must feature in the definition. So the answer is

c. leverage = stockholders’ equity / total assets

because debt is not mentioned at all.