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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 Stay Swift Corp. and make comments on its second-year performance as compared to its first-year performance.

The following shows Stay Swift Corp.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 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.

Stay Swift Corp.

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

	Year 2	Year 1
Net Sales	1,905	1,500
Operating costs except depreciation and amortization	1,365	1,268
Depreciation and amortization	95	60
Total Operating Costs	1,460	1,328
Operating Income (or EBIT)	445	172
Less: Interest	45	14
Earnings before taxes (EBT)	400	158
Less: Taxes (40%)	160	63
Net Income	240	95

Calculate the profitability ratios of Stay Swift Corp. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Ratio	Value
	Year 2	Year 1
Operating margin		11.47%
Net profit margin	12.60%
Return on total assets		2.70%
Return on common equity		5.07%
Basic earning power	7.89%

Decision makers and analysts look deeply into profitability ratios to identify trends in a companys 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 companys operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

An increase in a companys 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.

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 Stay Swift Corp. and make comments on its second-year performance as compared to its first-year performance. The following shows Stay Swift Corp's income statement for the last two years. The company had assets of 53,525 million in the first year and $5,639 million in the second year. Common equity was equal to $1,875 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. Stay Swift Corp. Income Statement for the Year Ending on December 31 (Millions of dollars) Year 1 Year 2 1,905 1,500 1,268 1,365 95 60 Net Sales 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 1,460 445 1,328 172 45 14 400 158 160 240 63 95 Calculate the profitability ratios of Stay Swift Corp. in the following table. Convert all calculations to a percentage rounded to two decimal places. Value Ratio Year 2 Year 1 11.47% 12.60% Operating margin Net profit margin Return on total assets Return on common equity Basic earning power 2.70% 5.07% 7.89% 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