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5. Profitability ratios Protability 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 rm. Your boss has asked you to calculate the protability ratios of Spandust Industries Inc. and make comments on its second-year performance as compared to its rst-year performance. The following shows Spandust Industries Inc.'s income statement for the last two years. The company had assets of $10,575 million in the rst year and $16,916 million in the second year. Common equity was equal to $5,625 million in the first year, and the company distributed 100% of its earnings out as dividends during the rst and the second years. In addition, the firm did not issue new stock during either year. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 5,715 4,500 Operating costs except depreciation and amortization 1,610 1,495 Depreciation and amortization 286 180 Total Operating Costs 1,896 1,675 Operating Income (or EBIT) 3,819 2,825 Less: Interest 516 226 Earnings before taxes (EBT) 3,303 2,599 Less: Taxes (40%) 1,321 1,040 Net Income 1,982 1,559 Calculate the profitability ratios of Spandust Industries Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin V 62.78% Prot margin 34.68% V Return on total assets V 14.74% Return on common equity V 27.72% Basic earning power 22.58% V Decision makers and analysts look deeply into protability ratios to identify trends in a company's protability. Protability ratios give insights into both the survivability of a company and the benets that shareholders receive. Identify which of the following statements are true about protability ratios. Check all that apply. m A higher operating margin than the industry average indicates either lower operating costs, higher product pricing, or both. C If a company's operating margin increases but its prot margin decreases, it could mean that the company paid more in interest or taxes. D An increase in the return on assets ratio implies an increase in the assets a rm owns. m If a company issues new common shares but its net income does not increase, return on common equity will increase