8. 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. Consider the following scenario Your boss has asked you to calculate the profitability ratios of Cold Goose Metal Works, Inc. and make comments on its second-year performance as compared to its first-year performance The following shows Cold Goose's income statement for the last two years. The company had assets of $8,225,000 in the first year and $13,157,200 in the second year. Common equity was equal to $4,375,000 in the first year, 100% of earings were paid out as dividends in the first year, and the firm did not Issue new stock in the second year. Year 2 Year 1 Cold Goose Metal Works, Inc. Income Statement For the Year Ending December 31 Net Sales Operating costs less depreciation and amortization Depreciation and amortization Total Operating costs Operating Income (or EBIT) Less: Interest $4,445,000 1,610,000 $222,250 1,832,250 52,612,750 261,275 $3,500,000 1,495,000 $140,000 1,635,000 $1,865,000 195,825 Earnings before taxes (EBT) Less: Taxes (40%) $2,351,475 940,590 $1,669,175 667,620 Calculate the profitability ratios of Cold Goose Metal Works, Inc. In the following table. Convert al calculations to a percentage rounded to two decimal places Ratio Value Year 2 Year 1 53.29% 31.74% Operating pront margin Net profit margin Return on total assets Return on common equity 12.18% 22.89% Decision makers and analysts look deeply into profitability ration 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. Identity which of the following statements are true about profitabiley ratios. Check all that apply a company has a net profit margin or 10%, it means that the company earned a net income of to 10 for each dollar of sales. a company's operating margin increases but les 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 aim owns If a company issues new common shares but its net income does not increase, return on common equity will increase Grade It Now Save A Continue