Using unlevered-company return on assets
It can be interesting to look at returns on assets for an unlevered company that is considering taking on debt for the first time. The usual justification for debt financing is that a company believes it can earn a better return on money than the cost of capital, and thus, taking on debt should increase the company's overall return on equity.
Note, however, that even a profitable venture financed by debt can still reduce returns on assets. That will occur if the marginal return on the debt-financed venture is less than the return on the unexpanded business. That's one reason why investors are sometimes skeptical of proposed expansion plans if they are expected to generate a lower rate of return than the business has historically produced -- even if that return can add to profits.
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