Evaluating Operational Efficiency of XYZ Corp.

Very Hard Analysis Techniques Ratio Analysis

Consider a company, XYZ Corp., that is analyzing its financial ratios to assess its operational efficiency relative to industry peers. In its most recent fiscal year, XYZ Corp. reported the following financial metrics:

Net Income: $1,200,000
Total Assets: $10,000,000
Equity: $5,000,000
Sales: $8,000,000

Using these figures, XYZ Corp. computes the following ratios:

Return on Assets (ROA): 12%
Return on Equity (ROE): 24%
Asset Turnover Ratio: 0.8

XYZ Corp.'s management is particularly concerned about how well it utilizes its assets to generate sales. Based on the context of XYZ Corp.’s performance as indicated by the financial ratios above, which of the following statements regarding the company's operational efficiency is most accurate?

XYZ Corp. has a low Asset Turnover Ratio, indicating inefficiency in utilizing its assets for sales generation.

Despite a higher ROE, the low Asset Turnover suggests XYZ Corp. relies more on equity financing than asset efficiency.

The ratios indicate that XYZ Corp. is efficiently managing its assets, as evidenced by its high ROA and ROE.

Hint

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