chapter 5

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 Randall and Arts Inc. and make comments on its second-year performance as com with its first-year performance. The following shows Randall and Arts Inc,'s income statement for the last two years. The company had assets of $9,400 million in the first year a $15,037 miltion in the second year. Common equity was equal to $5,000 million in the first year, and the company distributed 100% of its earnin out as dividends during the first and the second years. In addition, the firm did not issue new stock during either year. Randall and Arts Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Calculate the profitability ratios of Randall and Arts Inc. in the following table. Convert all calculations to a percentage rounded to two decimal Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profite ratios. Check all that apply. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each doliar 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 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