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 Spandust Industries Inc. and make comments on its second-year performance as compared with its first-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 first 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 first 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	1,855	1,723
Depreciation and amortization	286	180
Total Operating Costs	2,141	1,903
Operating Income (or EBIT)	3,574	2,597
Less: Interest	357	208
Earnings before taxes (EBT)	3,217	2,389
Less: Taxes (25%)	804	597
Net Income	2,413	1,792

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		57.71%
Profit margin	42.22%
Return on total assets		16.95%
Return on common equity		31.86%
Basic earning power	21.13%

Decision makers and analysts look deeply into profitability ratios to identify trends in a companys 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 margin than the industry average indicates either lower operating costs, higher product pricing, or both.

If a companys operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

An increase in a companys earnings means that the profit margin is increasing.

If a company issues new common shares but its net income does not increase, return on common equity will increase.