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. Consider the following scenario: Your boss has asked you to calculate the profitability ratios of Cute Camel Woodcraft Company and make comments on its second-year performance as compared to its first-year performance. The following shows Cute Camel's income statement for the last two years. The company had assets of $9,400,000 in the first year and $15,036,800 in the second year. Common equity was equal to $5,000,000 in the first year, 100% of earnings were paid out as dividends in the first year, and the firm did not issue new stock in the second year. Year 1 Cute Camel Woodcraft Company Income Statement For the Year Ending December 31 Net Sales Operating costs less depreciation and amortization Depreciation and amortization Total Operating costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Year 2 $5,080,000 1,855,000 $254,000 2,109,000 $2,971,000 297,100 $2,673,900 $4,000,000 1,722,500 $160,000 1,882,500 $2,117,500 275,275 $1,842,225 Earnings before taxes (EBT) Less: Taxes (40%) $2,673,900 1,069,560 $1,604,340 $1,842,225 736,890 $1,105,335 Net Income Calculate the profitability ratios of Cute Camel Woodcraft Company in the following table. Convert all calculations to a percentage rounded to two decimal places Ratio Value Year 2 Year 1 Operating profit margin 52.94% Net profit margin 31.58% 11.76% Return on total assets Return on common equity 22.11% Ratio Value Year 2 Year 1 52.94% 31.58% Operating profit margin Net profit margin Return on total assets Return on common equity 11.76% 22.11% 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 profit 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 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