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 $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 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 2Year 1Net Sales5,7154,500Operating costs except depreciation and amortization1,3651,268Depreciation and amortization286180Total Operating Costs1,6511,448Operating Income (or EBIT)4,0643,052Less: Interest406244Earnings before taxes (EBT)3,6582,808Less: Taxes (25%)915702Net Income2,7432,106 Calculate the profitability ratios of Diusitech Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places.RatioValue Year 2Year 1Operating margin 67.82%Profit margin48.00% Return on total assets 19.91%Return on common equity 37.44%Basic earning power24.02% 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 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 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.

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Description: 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 Diusitec

Ratio analysis is very important technique of management accounting. Under this various type of…

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Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter5: Evaluating Operating And Financial Performance

Section: Chapter Questions

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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 $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 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
Net Sales	5,715	4,500
Operating costs except depreciation and amortization	1,365	1,268
Depreciation and amortization	286	180
Total Operating Costs	1,651	1,448
Operating Income (or EBIT)	4,064	3,052
Less: Interest	406	244
Earnings before taxes (EBT)	3,658	2,808
Less: Taxes (25%)	915	702
Net Income	2,743	2,106

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

Ratio	Value
	Year 2	Year 1
Operating margin		67.82%
Profit margin	48.00%
Return on total assets		19.91%
Return on common equity		37.44%
Basic earning power	24.02%

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 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 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.

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