Question

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 Diusitech Inc. and make comments on its second-year performance as compared to its first-year performance The following shows Diusitech 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 mlion 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 Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Yar 1 Net Sales 5,715 4,500 1,268 180 1,448 4,0643,052 320 2,732 1,093 1,639 Operating costs except depreciation and amortization 1,365 286 1,651 Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net Income 406 3,658 1,463 2,195

Answer 1

1)	Ratio	Value
		Year 2	Year 1
	Operating margin (EBIT/Net sales)	71.11%	67.82%
	Profit margin (Net income/Net sales)	38.41%	36.42%
	Return on total assets (Net income/Total assets)	12.98%	15.50%
	Return on common equity (Net income/Common equity)	39.02%	29.14%
	Basic earning power (EBIT/Total assets)	24.02%	28.86%
	Note:
	Equity for the second year is the same as the equity for
	the first year, as the entire NI of the 2nd year is distributed
	as dividends and subject to the assumption no new equity
	is added during the second year.
2)	Statements true about profitability ratios:
	*If a company has a profit margin of 10%...................dollar
	of sales
	*If a company's operating margin increases……………………..
	interest or taxes