Your boss has asked you to calculate the profitability ratios of Dernham Inc. and make comments on its second-year performance as compared to its first-year performance.

The following shows Dernham Inc.s income statement for the last two years. The company had assets of $11,750 million in the first year and $18,796 million in the second year. Common equity was equal to $6,250 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	6,350	5,000
Operating costs except depreciation and amortization	1,610	1,495
Depreciation and amortization	318	200
Total Operating Costs	1,928	1,695
Operating Income (or EBIT)	4,422	3,305
Less: Interest	442	347
Earnings before taxes (EBT)	3,980	2,958
Less: Taxes (40%)	1,592	1,183
Net Income	2,388	1,775

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		66.10%
Net profit margin	37.61%
Return on total assets		15.11%
Return on common equity		28.40%
Basic earning power	23.53%

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 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.