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 Stay Swift Corp. and make comments on its second-year performance as compared with its first-year performance.

The following shows Stay Swift Corp.s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518 million in the second year. Common equity was equal to $2,500 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.

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

	Year 2	Year 1
Net Sales	2,540	2,000
Operating costs except depreciation and amortization	1,855	1,723
Depreciation and amortization	127	80
Total Operating Costs	1,982	1,803
Operating Income (or EBIT)	558	197
Less: Interest	75	21
Earnings before taxes (EBT)	483	176
Less: Taxes (25%)	121	44
Net Income	362	132

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

Ratio	Value
	Year 2	Year 1
Operating margin	21.97%	9.85%
Profit margin	14.25%	6.60%
Return on total assets	7.70%	2.81%
Return on common equity	14.48%	5.28%
Basic earning power	7.42%	2.62%