using the annual reports for Gap and American Eagle

https://umass.app.box.com/s/fk12vq9q58bwsxkkeno2djzy13lctkeh

https://umass.app.box.com/s/kusbatbnjhqm5vtqfqoe5v3a3c2zxiz9

There are also many, many ways to analyze profitability. See Appendix C pg 728-730 for the "Summary of Financial Ratios" One useful approach is to do "vertical analysis" of the income statement. Basically, every line of the income statement is stated as a % of sales revenue. Many "standard" profitability ratios, are just key income statement lines restated as a % in this fashion. Gross margin % (gross profit/sales) and Profit % (net income/sales) are common examples of these. I have you compute the Gross Margin % below as it is often an important indicator. Note that gross margin is a number, while gross margin ratio or gross margin percentage is the computation gross margin/sales. There are many other common profitability ratios. Return on equity and Return on assets are probably the most commonly used indicators. I have you compute a simplified version of return on equity below. Compute it as net income/total equity. Just use end of year equity in the denominator (usually you compute an average equity). The numerator is often adjusted for interest expense and we will ignore that variation as well. Round all of the computations to 3 decimal places. Show all of these as a percentage.(i.e. if your answer is 3475 round then format it as 34.8 (OWL has the % sign so do not add that). These ratios are also readily available at financial sites. However, please note that you really need to scan the income statement detail before making decisions based on just the ratios. There may be unusual item in the income statement that can distort the ratios and the comparisons. Some analysts use income before special items (discontinued operation or extraordinary items) to compute the ratios. If other unusual (but not special) items are in the body of the income statement, net income could be adjusted for that, as well. Do not try to do that here, however. Just be aware of the possible benefit of that type of analysis