$6.$ 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 to its first$-$year performance.

The following shows Gadget Twin 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.

Gadget Twin Inc.

Income Statement For the Year Ending on December $31($Millions of dollars$)$

Year $2$

Year $1$

Net Sales $3,1752,500$

Operating costs except depreciation and amortization $1,6101,495$

Depreciation and amortization $159100$

Total Operating Costs $1,7691,595$

Operating Income $($or EBIT$)1,406905$

Less: Interest $190118$

Earnings before taxes $($EBT$)1,216787$

Less: Taxes $(40\%)486315$

Net Income $730472$

Calculate the profitability ratios of Gadget Twin Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Ratio

Value

Year $2$

Year $1$

Operating margin $36\mathrm{.}20\%$

Net profit margin $22\mathrm{.}99\%$

Return on total assets $8\mathrm{.}03\%$

Return on common equity $15\mathrm{.}10\%$

Basic earning power $14\mathrm{.}96\%$