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 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 $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 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 3,810 3,000 Operating costs except depreciation and amortization 1,610 1,495 Depreciation and amortization 191 120 1,801 1,615 Total Operating Costs Operating Income (or EBIT) 2,009 1,385 Less: Interest 271 145 1,738 1,240 Earnings before taxes (EBT) Less: Taxes (25%) 435 310 Net Income 1,303 930 Ratio Value Year 2 Year 1 Operating margin 46.17% Profit margin 34.20% Return on total assets 13.19% Return on common equity 24.80% Basic earning power 17.81% Decision makers and analysts look deeply into profitability ratios to identify trends in a company's 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 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 the return on assets ratio implies an increase in the assets a firm owns. If a company issues new common shares but its net income does not increase, return on common equity will increase