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 Dernham Inc. and make comments on its second-year performance as compared with its first-year performance.

The following shows Dernham Inc. s income statement for the last two years. The company had assets of $8,225 million in the first year and $13,157 million in the second year. Common equity was equal to $4,375 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.

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

	Year 2	Year 1
Net Sales	4,445	3,500
Operating costs except depreciation and amortization	1,610	1,495
Depreciation and amortization	222	140
Total Operating Costs	1,832	1,635
Operating Income (or EBIT)	2,613	1,865
Less: Interest	353	196
Earnings before taxes (EBT)	2,260	1,669
Less: Taxes (25%)	565	417
Net Income	1,695	1,252

Calculate the profitability ratios of Dernham Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Ratio	Value
	Year 2	Year 1
Operating margin		53.29%
Profit margin	38.13%
Return on total assets		15.22%
Return on common equity		28.62%
Basic earning power	19.86%