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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 Gadget Twin Inc. and make comments on its second-year performance as compared with its first-year performance The following shows Gadget Twin Inc.'s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 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. Gadget Twin Inc. Income Statement for the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,810 3,000 1,010 1995 Operating costs except depreciation and amortization Depreciation and amortization 191 120 Total Operating costs 1,801 1,615 Operating Income (or EBIT 2.009 1,385 Less: Interest 201 Earnings before taxes (EBT) 1,274 Net Income Ratio Value Year 2 Operating margin Profit margin 35.59 Return on total assets Return on common equity Basic earning power 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 profit margin of 10% it means that the company earned a net income of $0.10 for each collar of sales. If a company's operating margin increases but its profit margin decreases, it could mean that the m taxes any paid more in interest or An increase in the return on assets ratio implies an increase in the assets a form owns If a company issues new common shares but its net income does not increase return on common equity will increase the profitability ratios of Gadget Twin Inc. in the following table. Convert all calculations to a percentage percentage rounded to two decimal places Year 2 Year 1 ang margin 46.17% margin 66.97% on total assets 13.55% 25.47% on common equity 52.73% earning power 36.35% makers and analysts lo 63.28% into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability Check all that apply If a company has a profit margin of 10%, it means that the company camed a net income of $0.10 for each dollar of sales. Ir a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or 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 Ratio Value Year 2 Operating margin 46.17% Profit margin 35.59% Return on total assets 42.97% Return on common equity Basic earning power 17.81% 45.20% 25.079 i Decision makers and analysts look deeply into prol both the survivability of a company and the bener ratios. Check all that apply. os to identify trends in a company's profitability. Profitability ratios give insights into reholders receive. Identify which of the following statements are true about profitability 1. If a company has a 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 ne An increase in the return on assets ratio implies an increase in the assets a form owns ra company issues new common shares but its not income does not increase, return on common equity will increase late the prontability ratio of Gadget lwin Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. atio Value Year 2 Year 1 46.17% 35.59% perating margin rofit margin eturn on total assets Ceturn on common equity Sasic earning power 13.55% 25.47% 19.23% mcision makers and analysts id oth the survivability of a comp tios. Check all that apply. 8.47% not Into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into l e benefits that shareholders receive. Identify which of the following statements are true about profitability 13.82% If a company has a profit margin of 10 it means that the company earned a net income of $0.10 for each dollar of sales. tra companys operating margin increases but its pront margin decreases, it could mean that the company paid more in interest or an increase in the retum on assets ratio imples an increase in the assets a rm owns. Calculate the profitability ratios of Gadget Twin Inc. in the following nvert all calculations to a percentage rounded to two decimal places Ratio Value Operating margin Profit margin 35.59% Return on total assets Return on common equity Basic earning power 36.16 Decision makers and analysts 44.4% both the survivabit of a comp ratios. Check all that apply. to profitability ratios to identify trends in a company's profitability Profitability ratios give insights into e benefits that shareholders receive Identity which of the following statements are true about profitability a company has a pon g 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 An increase in the retum on assets ratio implies an increase in the assets firm owns. Calculate the prototy s e Ratio Value Year 2 Operating margin Profit margin Return on total assets 35.59% 13.559 Return on common equity 25.47% Basic earning power 17.51 hos to identify trends in a company's profitability. Profitability ratios give insights into Yeholders receive. Identify which of the following statements are true about profitability Decision makers and analysts look deeply into pro 19.69 both the survivably of a company and the benet 14.74 ratios. Check all that apply. 28.50 a company has prott margin of tof a ns that the company earned net income of 50.10 for each dollar of sales. a company's operating margin increases but its profit margin decreases, it could mean that the company pold more in interest or An increase in the retum on assets ratio implies an increase in the assets firm owns