5. Profitability ratios 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 Sixty-Second Avenue Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Sixty-Second Avenue Inc.s income statement for the last two years. The company had assets of $5,875 million in the first year and $9,398 million in the second year. Common equity was equal to $3,125 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. Sixty-Second Avenue Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,175 2,500 Operating costs except depreciation and amortization 1,120 1,040 Depreciation and amortization 159 100 Total Operating Costs 1,279 1,140 Operating Income (or EBIT) 1,896 1,360 Less: Interest 190 109 Earnings before taxes (EBT) 1,706 1,251 Less: Taxes (40%) 682 500 Net Income 1,024 751 Calculate the profitability ratios of Sixty-Second Avenue Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin 54.40% Profit margin 32.25% Return on total assets 12.78% Return on common equity 24.03% Basic earning power 20.17% 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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Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Sixty-Second Avenue Inc. and make comments its second-year performance as compared with its first-year performance. The following shows Sixty-Second Avenue Inc.'s income statement for the last two years. The company had assets of $575 million in the first year and $9,398 million in the second year. Common equity was equal to $3,125 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. Calculate the profitability ratios of Sixty-Second Avenue Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitab in both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitabily 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 company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. An increase in a company's 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