5. Profitability ratiosProfitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on theoperating 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 with itsfirst-year performance.The following shows Diusitech Inc.'s income statement for the last two years. The company had assets of $4,700 million in the first year and $7,518million 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 asdividends 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 Year 12,5402,0001,6101,495127801,73780380723181542Net SalesOperating costs except depreciation and amortizationDepreciation and amortizationTotal Operating CostsOperating Income (or EBIT)Less: InterestEarnings before taxes (EBT)Less: Taxes (25%)Net Income1,5754254538095285 Calculate the profitability ratios of Diusitech Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.RatioOperating marginProfit marginReturn on total assetsReturn on common equityBasic earning powerValueYear 20021.34%10.68%Year 121.25%6.06%11.40%Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights intoboth the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitabilityratios. Check all that apply.A higher operating margin than the industry average indicates either lower operating costs, higher product pricing, or both.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 the return on assets ratio implies an increase in the assets a firm owns.If a company issues new common shares but its net income does not increase, return on common equity will increase.

The operating margin is an important measure of overall profitability from operations. It is the…

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 Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'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. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 2,540 2,000 1,610 1,495 127 80 1,737 803 80 723 181 542 Net Sales Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (25%) Net Income 1,575 425 45 380 95 285

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 Diusitech Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Diusitech Inc.'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. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 2,540 2,000 1,610 1,495 127 80 1,737 803 80 723 181 542 Net Sales Operating costs except depreciation and amortization Depreciation and amortization Total Operating Costs Operating Income (or EBIT) Less: Interest Earnings before taxes (EBT) Less: Taxes (25%) Net Income 1,575 425 45 380 95 285

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter5: Evaluating Operating And Financial Performance

Section: Chapter Questions

Problem 9EP

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Analyze and compare Bank of America and Wells Fargo Bank of America Corporation (BAC) and Wells Fargo Company (WFC) are two large financial services companies. The following data (in millions) were taken from a recent years financial statements for both companies: a. Compute the earnings per share for both companies. Round to the nearest cent. a. Which company appears to be more profitable on an earnings-per-share basis? b. Which company would you expect to have the larger quoted market price?
Define each of the following terms: Liquidity ratios: current ratio; quick, or acid test, ratio Asset management ratios: inventory turnover ratio; days sales outstanding (DSO); fixed assets turnover ratio; total assets turnover ratio Financial leverage ratios: debt ratio; times-interest-earned (TIE) ratio; EBITDA coverage ratio Profitability ratios: profit margin on sales; basic earning power (BEP) ratio; return on total assets (ROA); return on common equity (ROE) Market value ratios: price/earnings (P/E) ratio; price/cash flow ratio; market/book (M/B) ratio; book value per share Trend analysis; comparative ratio analysis; benchmarking DuPont equation; window dressing; seasonal effects on ratios
To get an overall picture of each company's capital structure, it is helpful to look at a the Key Ratios screen and then select the Financial Health tab. Common size balance sheet data are provided over a 10-year period. What, if any, are the major trends that emerge when you're looking at those data? Do those companies tend to have relatively high or relatively low levels of debt? Do these companies have significant levels of current liabilities? Have their capital structures changed over time? Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. This chapter provides an overview of the effects of leverage and describes the process that firms use to determine their optimal capital structure. The chapter also indicates that capital structures tend to vary across industries and across countries. If you are interested in exploring these differences in more detail, the Morningstar website provides information about the capital structures of each of the companies it follows. The following discussion questions demonstrate how we can use this information to evaluate the capital structures for four restaurant companies: Cheesecake Factory (CAKE), Chipotle Mexican Grill (CMG), Ruby Tuesday (RT), and O'Charley's Inc. (CHUX).
Quiz 2: Solvency Debt-to-equity ratio Times interest earned ratio Debt service coverage ratio Cash flow from operations to capital expenditures ratio Profitability Return on assets ratio Return on sales ratio Asset turnover ratio Return on common stockholders equity ratio Leverage Earnings per share (EPS) Price/earnings (P/E) ratio Dividend payout ratio Dividend yield ratio A measure of a companys success in earning a return for the common stockholders. The relationship between a companys performance according to the income statement and its performance in the stock market. The ability of a company to remain in business over the long term. A variation of the profit margin ratio; measures earnings before payments to creditors. A companys bottom line stated on a per-share basis. The percentage of earnings paid out as dividends. The ratio of total liabilities to total stockholders equity. A measure of the ability of a company to finance long-term asset acquisitions with cash from operations. A measure of a companys success in earning a return for all providers of capital. The relationship between net sales and average total assets. The relationship between dividends and the market price of a companys stock. The use of borrowed funds and amounts contributed by preferred stockholders to earn an overall return higher than the cost of these funds. An income statement measure of the ability of a company to meet its interest payments. A statement of cash flows measure of the ability of a company to meet its interest and principal payments. How well management is using company resources to earn a return on the funds invested by various groups.