ROA (Return on Assets) and ROE (Return on Equity) are both profitability ratios that are used to evaluate a company's efficiency and performance. They both measure the return generated by a company's assets or equity, respectively.

ROA is a measure of how efficiently a company is using its assets to generate profits. It is calculated by dividing net income by total assets. A higher ROA indicates that a company is generating more income per dollar of assets and is considered more efficient.

ROE, on the other hand, measures how much profit a company generates in relation to its shareholders' equity. It is calculated by dividing net income by shareholders' equity. A higher ROE indicates that a company is generating more income per dollar of equity and is considered more profitable.

Financial leverage refers to the use of borrowed money or debt to finance a company's operations or investments. The goal of financial leverage is to increase the potential return on an investment by using borrowed money to magnify the returns on equity.

 

Question:

1) What happens if the business is not profitable and doesn't make enough to service the debt?