5 Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm Your boss has asked you to calculate the profitability ratios of Blur Corp and make comments on its second year performance as compared with its first year performance The following shows Blur Corp s income statement for the last two years The company had assets of $3,525 million in the first year and $5,639 million in the second year Common equity was equal to $1,875 million in the first year, and the company distributed 100 of its earnings out as dividends during the first and the second years In addition, the firm did not issue new stock during either year Blur Corp Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 1,905 1,500 Operating costs except depreciation and amortization 1,120 1,040 Depreciation and amortization 95 60 Total Operating Costs 1,215 1,100 Operating Income (or EBIT) 690 400 Less Interest 69 42 Earnings before taxes (EBT) 621 358 Less Taxes (25 ) 155 90 Net Income 466 268 Calculate the profitability ratios of Blur Corp in the following table Convert all calculations to a percentage rounded to two decimal places Ratio Value Year 2 Year 1 Operating margin 26 67 Profit margin 24 46 Return on total assets 7 60 Return on common equity 14 29 Basic earning power 12 24 Decision makers and analysts look deeply into profitability ratios to identify trends in a companys profitability Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive Identify which of the following statements are true about profitability ratios Check all that apply If a company has a profit margin of 10 , it means that the company earned a net income of $0 10 for each dollar of sales If a companys operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes An increase in a companys earnings means that the profit margin is increasing If a company issues new common shares but its net income does not increase, return on common equity will increase

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5. Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance

Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm.

Your boss has asked you to calculate the profitability ratios of Blur Corp. and make comments on its second-year performance as compared with its first-year performance.

The following shows Blur Corp.s income statement for the last two years. The company had assets of $3,525 million in the first year and $5,639 million in the second year. Common equity was equal to $1,875 million in the first year, and the company distributed 100% of its earnings out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year.

Blur Corp. Income Statement For the Year Ending on December 31 (Millions of dollars)

	Year 2	Year 1
Net Sales	1,905	1,500
Operating costs except depreciation and amortization	1,120	1,040
Depreciation and amortization	95	60
Total Operating Costs	1,215	1,100
Operating Income (or EBIT)	690	400
Less: Interest	69	42
Earnings before taxes (EBT)	621	358
Less: Taxes (25%)	155	90
Net Income	466	268

Calculate the profitability ratios of Blur Corp. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Ratio	Value
	Year 2	Year 1
Operating margin		26.67%
Profit margin	24.46%
Return on total assets		7.60%
Return on common equity		14.29%
Basic earning power	12.24%	Decision makers and analysts look deeply into profitability ratios to identify trends in a companys profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios. Check all that apply. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. If a companys operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. An increase in a companys earnings means that the profit margin is increasing. If a company issues new common shares but its net income does not increase, return on common equity will increase.