Attempts $$ Average $/5$

$7.$ More on ratio analysis

Analysts and investors often use return on equity $($ROE$)$ to compare profitability of a company with other firms in the industry. ROE is considered a very important measure, and managers strive to make the company's ROE numbers look good.

If a firm takes steps that increase its expected future ROE, its stock price will, $$ increase.

Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bonus is solely based on the ROE of the next project?

Project X$,$ with $35\%$ ROE and a large investment, generating high expected cash flows

Project $Y,$ with $40\%$ ROE and a small investment, generating low expected cash flows

Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a trend analysis, you would:

Analyze the firm's financial ratios over time

Compare the firm's financial ratios with other firms in the industry for a particular year

You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors $($Aaii$).$

According to your understanding, a company with one key customer is considered to be $$ risky than companies with several customers.

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