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 Petroxy Oil Co. and make comments on its second-year performance as compared with its first-year performance. The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $9,400 million in the first year and $15,037 million in the second year. Common equity was equal to $5,000 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. Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,080 4,000 1,855 1,723 254 160 Net Sales Operating costs except depreciation and amortization Depreciation and amortization
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 Petroxy Oil Co. and make comments on its second-year performance as compared with its first-year performance. The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $9,400 million in the first year and $15,037 million in the second year. Common equity was equal to $5,000 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. Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,080 4,000 1,855 1,723 254 160 Net Sales Operating costs except depreciation and amortization Depreciation and amortization
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Transcribed Image Text:Calculate the profitability ratios of Petroxy Oil Co. in the following table. Convert all calculations to a percentage rounded to two decimal places.
Ratio
Operating margin
Profit margin
Return on total assets
Return on common equity
Basic earning power
Value
Year 2
39.47%
19.76%
Year 1
52.92%
15.12%
28.42%
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.
O 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.
Transcribed Image Text: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 Petroxy Oil Co. and make comments on its second-year performance as compared with
its first-year performance.
The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $9,400 million in the first year and $15,037
million in the second year. Common equity was equal to $5,000 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.
Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars)
Year 2
Year 1
5,080
4,000
1,855
1,723
254
160
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
2,109
2,971
297
2,674
669
2,005
1,883
2,117
222
1,895
474
1,421
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A group of financial measurements known as profitability ratios are employed to evaluate a company's potential to create profits over time in relation to its revenue, operational expenses, balance sheet assets, and shareholders' equity.
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