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 Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Spandust Industries Inc.’s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 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. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,810 3,000 Operating costs except depreciation and amortization 1,855 1,723 Depreciation and amortization 191 120 Total Operating Costs 2,046 1,843 Operating Income (or EBIT) 1,764 1,157 Less: Interest 238 121 Earnings before taxes (EBT) 1,526 1,036 Less: Taxes (25%) 382 259 Net Income 1,144 777 Calculate the profitability ratios of Spandust Industries Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin 38.57% Profit margin 30.03% Return on total assets 11.02% Return on common equity 20.72% Basic earning power 15.64% 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. 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.

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 Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance. The following shows Spandust Industries Inc.’s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 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. Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 Net Sales 3,810 3,000 Operating costs except depreciation and amortization 1,855 1,723 Depreciation and amortization 191 120 Total Operating Costs 2,046 1,843 Operating Income (or EBIT) 1,764 1,157 Less: Interest 238 121 Earnings before taxes (EBT) 1,526 1,036 Less: Taxes (25%) 382 259 Net Income 1,144 777 Calculate the profitability ratios of Spandust Industries Inc. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value Year 2 Year 1 Operating margin 38.57% Profit margin 30.03% Return on total assets 11.02% Return on common equity 20.72% Basic earning power 15.64% 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. 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.

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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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 Spandust Industries Inc. and make comments on its second-year performance as compared with its first-year performance.

The following shows Spandust Industries Inc.’s income statement for the last two years. The company had assets of $7,050 million in the first year and $11,278 million in the second year. Common equity was equal to $3,750 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.

Spandust Industries Inc. Income Statement For the Year Ending on December 31 (Millions of dollars)

	Year 2	Year 1
Net Sales	3,810	3,000
Operating costs except depreciation and amortization	1,855	1,723
Depreciation and amortization	191	120
Total Operating Costs	2,046	1,843
Operating Income (or EBIT)	1,764	1,157
Less: Interest	238	121
Earnings before taxes (EBT)	1,526	1,036
Less: Taxes (25%)	382	259
Net Income	1,144	777

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

Ratio	Value
	Year 2	Year 1
Operating margin		38.57%
Profit margin	30.03%
Return on total assets		11.02%
Return on common equity		20.72%
Basic earning power	15.64%

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.

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.

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