Question

 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 Sixty-Second Avenue Inc. and make comments on its second-year performance as compared with its first-year performance.

The following shows Sixty-Second Avenue 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.

Sixty-Second Avenue 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	1,120	1,040
Depreciation and amortization	318	200
Total Operating Costs	1,438	1,240
Operating Income (or EBIT)	4,912	3,760
Less: Interest	663	395
Earnings before taxes (EBT)	4,249	3,365
Less: Taxes (25%)	1,062	841
Net Income	3,187	2,524

Calculate the profitability ratios of Sixty-Second Avenue Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.

Ratio	Value
	Year 2	Year 1
Operating margin	77.35%	75.20%
Profit margin	50.19%	50.48%
Return on total assets	16.96%	21.48%
Return on common equity	50.99%	40.38%
Basic earning power	26.13%	32.00%