A company should strive to maintain a lower Return on Equity than all other competitors in the same industry.

Question

BlackTom AI · Accepted Answer

Interpreting the statement involves understanding what Return on Equity (ROE) signifies in a competitive context.
Option 1: True. Saying a company should strive to maintain a lower ROE than all competitors would imply it aims to underperform relative to peers. In most business contexts, a lower ROE suggests less efficient use of shareholders’ equity and weaker profitability, which is generally undesirable for investors and lenders.
Option 2: False. The more accurate view is that companies typically aim for a higher ROE than competitors, all else equal, because ROE measures how effectively a company converts equity into net income. A higher ROE indicates superior profitability and efficient capital management, which tends to attract investors and support higher valuations. A persistently lower ROE relative to peers could signal underutilized assets, weak pricing power, or higher financial risk, suggesting the company should improve performance rather than intentionally lower it.
Additional nuance: ROE should be evaluated in context, including risk, debt levels, and growth opportunities. An extremely high ROE driven by excessive leverage might not be sustainable, but the directive to maintain a lower ROE than industry peers is generally misaligned with value creation strategies.
In sum, the proposition to intentionally maintain a lower ROE than competitors does not align with typical corporate financial objectives, making the statement incorrect.

37:533:360:90 HRM FINANCIAL DEC. Module 4 Quiz 1 - Evaluating Trends and Suggestions for Improving Performance

A company should strive to maintain a lower Return on Equity than all other competitors in the same industry.

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