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 Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'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. Diusitech Inc. 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 1,120 1,040 Depreciation and amortization 127 80 Total Operating Costs 1,247 1,120 Operating Income (or EBIT) 1,293 880 Less: Interest 175 92 1,118 788 Earnings before taxes (EBT) Less: Taxes (25%) 280 197 Net Income 838 591 Calculate the profitability ratios of Diusitech Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin 44.00% Profit margin 32.99% Return on total assets 12.57% Return on common equity 23.64% Basic earning power 17.20% 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 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