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 Petroxy Oil Co. and make comments on its second-year performance as compared to its first-year performance. The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $10,575 million in the first year and s16,916 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100 % of its earnings out as dividends during the first and the second years. In additlon, the firm did not issue new stock during either year. Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,715 4,500 Net Sales 1,120 1,040 Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs 286 160 1,406 1,220 4,309 3,280 Operating Income (or EBIT) 431 426 Less: Interest 3,878 2,854 Earnings before taxes (EBT) 1,551 1,142 Less: Taxes (40% ) 2,327 1,712 Net Income Calculate the profitability ratios of Petroxy Oil Co. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin Profit margin 72.89% 40.72% Return on total assets 16.19% v Return on common equityY 30.44% Basic earning power 25.47% Decision makers and analysts fook 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 profitabity ratios. Check all that apply. If a company has a profit margin of 10%, it means that the company earned a net income of so.10 for each dollar of sales. An increase in the return on assets ratio implics an increase in the assets a firm owns. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. If a company issues new common shares but its net income does not increase, return on common equity will increase