Question

5. Profitability ratios 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 Petroxy Oil Co. and make comments on its second-year performance as compared to its first-year performance The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518 million in the second year. Common equity was equal to $2,500 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 Petroxy Oil Co Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Yar 1 2,000 1,268 80 1,348 652 68 584 234 350 Net Sales 2,540 1,365 127 1,492 1,048 105 943 377 566 Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (40%) Net Income

Answer 1

Please provide rating...

answer 1			Year 2	Year 1
	a	Net sales	2540	2000
	b	Operating cost except depreciation and amortization	1365	1268
	c	Depreciation and amortization	127	80
	d	Total operating cost	1492	1348
	e	Operating income(EBIT)	1048	652
	f	Less : Interest	105	68
	g	EBT	943	584
	h	Less : Taxes	377	234
	i	Net income	566	350
	j	Total asset	7518	4700
	k	Equity	2500	2500
	l=e/a	Operating margin	41.26%	32.60%
	m=i/a	Profit margin	22.28%	17.50%
	n=i/j	Return on Total asset	7.53%	7.45%
	o=i/k	Return on total equity	22.64%	14.00%
	p=e/j	Basic earner power	13.94%	13.87%
answer 2	Correct statement is :
	IF a company’s operating margin increases but its profit margin decreases , it could mean that the company paid more in interest or taxes