Writing Assignment Interpreting ratios
Following are the debt to assets, return on assets, and return on equity ratios for four companies from two different industries. The interest rate shown for each company is its approximate average interest rate on all debt. Each of these public companies is a leader in its particular industry. The data for
Wachovia and Toll Brothers are for the fiscal years ending in 2005, and the data for Wells Fargo and
Pulte are for the fiscal years ending in 2004. All numbers are percentages.
Wells Fargo & Co.
Home Construction Industry
Toll Brothers, Inc.
a. Based only on the debt to assets ratios, the banking companies appear to have the most financial risk. Generally, companies with more financial risk have higher interest rates. Write a brief explanation of why the banking companies can borrow money at lower interest rates than the construction companies.
b. Explain why the return on equity ratio for Wachovia is more than 10 times greater than its return on assets ratio, while the return on equity ratio for Pulte is less than 3 times greater than its return on assets ratio.