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 Randall and Arts Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Randall and Arts Inc.'s income statement for the last two years. The company had assets of $5,875 million in the first year and $9,398 million in the second year. Common equity was equal to $3,125 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. 1,610 Randall and Arts Inc. Income Statement for the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,175 2,500 Operating costs except depreciation and amortization 1,495 Depreciation and amortization 159 100 Total Operating Costs 1,769 1,595 Operating Income (or EBIT) 1,406 905 Less: Interest 190 95 Earnings before taxes (EBT) 1,216 810 Less: Taxes (40%) 486 324 Net Income 730 486 Calculate the profitability ratios of Randall and Arts Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin 36.20% Profit margin 22.99% Return on total assets 8.27% Return on common equity 15.55% Basic earning power 14.96% 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