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 Gadget Twin Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Gadget Twin Inc.'s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,157 million in the second year. Common equity was equal to $4,375 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. Gadget Twin Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,445 3,500 Net Sales 1,365 1,268 222 140 Operating costs except depreciation and amortization Depreciation and amortization 1,587 1,408 2,858 2,092 Total Operating costs 220 Operating Income (or EBIT) 286 1,872 Less: Interest 2,572 643 468 Earnings before taxes (EBT) Less: Taxes (25%) 1,929 1404 Net Income 31F C culations to a percentage rounded to two decimal places. Calculate the profitability ratios or Gadget IC Ratio Value Year 2 Year 1 Operating margin 59.77% Profit margin 43.40% Return on total assets 17.07% Return on common equity 32.09% Basic earning power 21.72% 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. A higher operating margin than the industry average indicates either lower operating costs, higher product pricing, or both. 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