6. Profitability ratios Aa Aa 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 firnm 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 $3,525 million in the first year and $5,639 million in the second year. Common equity was equal to $1,875 milion 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 Petroxy Oil Co Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Yar 1 Net Sales 1,905 1,120 95 1,215 690 1,500 1,040 60 1,100 400 52 348 139 209 Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net Income 621 248 373 Calculate the profitability ratios of Petroxy Oil Co. in the following table. Convert all calculations to a percentage rounded to two decimal places 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 profit margin Net profit margin Return on total assets Return on common equity Basic earning power | | 26.67% 19.58% 5.93% 11.15% 12.24% L 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 profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. An increase in a company's earnings means that the net profit margin is increasing. 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