assets must be calculated
3. 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 Dernham Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Dernham Inc.'s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,15 million in the second year. Common equity was equal to $4,375 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. 140 Dernham Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 4,445 3,500 Operating costs except depreciation and amortization 1,120 1,040 Depreciation and amortization 222 Total Operating costs 1,342 1,180 Operating Income (or EBIT) 3,103 2,320 Less: Interest Earnings before taxes (EBT) 2,793 2,134 Less: Taxes (25%) 698 534 2,095 1,600 310 186 Net Income Calculate the profitability ratios of Dernham Inc. In the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 66.29% 47.13% Operating margin Profit margin Return on total assets Return on common equity Basic earning power 19.45% 36.57% 23.58% 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. 3. Profitability ratios Profitability ratios help in the analysis of the combined Impact of liquidity ratlos, asset management ratios, and debt management ratlos on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Dernham Inc. and make comments on its second-year performance as compared with its first-year performance The following shows Dernham Inc.'s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,157 million in the second year. Common equity was equal to 54,37 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 se new stock during either year, Dernham Inc. Income Statement for the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 4,445 3,500 1.120 1,040 140 222 1,342 1.10 Net Sales Operating costs except depreciation and amortization Depreciation and amortization Total Operating costs Operating income (or EBIT) Less Interest Earnings before taxes (ET) Less: Taxes (259) Net Income 2,320 3,103 310 2,793 186 698 2,095 2,134 534 1,600
