Leverage Effect On ROE

This question practices a core accounting idea in financial statement analysis: how capital structure changes the link between profitability measured on assets and profitability measured on equity. A candidate needs to understand what each ratio uses as its denominator, how debt changes the balance sheet, and why adding leverage can make the equity base smaller relative to the asset base. Interviewers ask this because it tests whether you can connect the income statement and balance sheet, think clearly about financing effects, and avoid common mistakes about debt, equity, and profitability.