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 Red Snail Satellite Company and make comments on its second-year performance as compared to its first-year performance. The following shows Red Snail Satellite's income statement for the last two years. The company had assets of $11,750 million in the first year and $18,796 million in the second year. Common equity was equal to $6,250 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. Red Snail Satellite Company Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 6,350 5,000 Operating costs except depreciation and amortization 1,855 1,723 Depreciation and amortization 318 200 Total Operating Costs 2,173 1,923 Operating Income (or EBIT) 4,177 3,077 Less: Interest 400 Earnings before taxes (EBT) 3,759 2,677 Less: Taxes (40%) 1,504 1,071 Net Income 2,255 1,606 418 Calculate the profitability ratios of Red Snail Satellite Company in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating profit margin 61.54% Net profit margin 35.51% Return on total assets 13.67% 25.70% Return on common equity Basic earning power 22.22% 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. If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. 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 net profit margin is increasing. If a company issues new common shares but its net income does not increase, return on common equity will increase. 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 Red Snail Satellite Company and make comments on its second-year performance as compared to its first-year performance. The following shows Red Snail Satellite's income statement for the last two years. The company had assets of $11,750 million in the first year and $18,796 million in the second year. Common equity was equal to $6,250 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. Red Snail Satellite Company Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 6,350 5,000 Operating costs except depreciation and amortization 1,855 1,723 Depreciation and amortization 318 200 Total Operating Costs 2,173 1,923 Operating Income (or EBIT) 4,177 3,077 Less: Interest 400 Earnings before taxes (EBT) 3,759 2,677 Less: Taxes (40%) 1,504 1,071 Net Income 2,255 1,606 418 Calculate the profitability ratios of Red Snail Satellite Company in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating profit margin 61.54% Net profit margin 35.51% Return on total assets 13.67% 25.70% Return on common equity Basic earning power 22.22% 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. If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. 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 net profit margin is increasing. If a company issues new common shares but its net income does not increase, return on common equity will increase