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 Blur Corp. and make comments on its second-year performance as compared to its first- year performance. 

The following shows Blur Corp.'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. 

Blur Corp. 

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 (40%)	1,700	1,346
Net Income	2,549	2,019

Calculate the profitability ratios of Blur Corp. in the following table. Convert all calculations to a percentage rounded to two decimal places. 

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's 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. 

• If a company has a net profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. 

• If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. 

• An increase in a company's 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.

Answer 1

rate positively..

			year 2		year 1
i	Net sales		6,350		5,000
ii	Operating cost except depreciation and amortization		1,120		1,040
iii	Depreciation and amortization		318		200
iv	Total operating cost		1,438		1,240
v	Operating income (or EBIT)		4,912		3,760
vi	Less: Interest		663		395
vii	Earning before taxes (EBT)		4,249		3,365
viii	Less: Taxes (40%)		1,700		1,346
ix	Net income		2,549		2,019
x	Total asset =		18,796		11,750
xi	Common equity=		6,250		6,250
	Ratio
a) = v/i	Operating margin		77.35%		75.20%
b)=ix/i	net operating margin		40.14%		40.38%
c)=ix/x	return on total asset		13.56%		17.18%
d)=ix/xi	return on common equity		40.78%		32.30%
e)=v/x	Basic earning power		26.13%		32.00%
	Ans : Statement 1, 2 and 4 are true .