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 $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. Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars)   Year 2 Year 1 Net Sales 2,540 2,000 Operating costs except depreciation and amortization 1,610 1,495 Depreciation and amortization 127 80 Total Operating Costs 1,737 1,575 Operating Income (or EBIT) 803 425 Less: Interest 80 55 Earnings before taxes (EBT) 723 370 Less: Taxes (25%) 181 93 Net Income 542 277   Calculate the profitability ratios of Petroxy Oil Co. in the following table. Convert all calculations to a percentage rounded to two decimal places. Ratio Value   Year 2 Year 1 Operating margin      21.25% Profit margin 21.34%      Return on total assets      5.89% Return on common equity      11.08% Basic earning power 10.68%        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 a company’s earnings means that the profit margin is increasing.   If a company issues new common shares but its net income does not increase, return on common equity will increase.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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 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 $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.
Petroxy Oil Co. Income Statement For the Year Ending on December 31 (Millions of dollars)
 
Year 2
Year 1
Net Sales 2,540 2,000
Operating costs except depreciation and amortization 1,610 1,495
Depreciation and amortization 127 80
Total Operating Costs 1,737 1,575
Operating Income (or EBIT) 803 425
Less: Interest 80 55
Earnings before taxes (EBT) 723 370
Less: Taxes (25%) 181 93
Net Income 542 277
 
Calculate the profitability ratios of Petroxy Oil Co. in the following table. Convert all calculations to a percentage rounded to two decimal places.
Ratio
Value
  Year 2 Year 1
Operating margin      21.25%
Profit margin 21.34%     
Return on total assets      5.89%
Return on common equity      11.08%
Basic earning power 10.68%     
 
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 a company’s earnings means that the profit margin is increasing.
 
If a company issues new common shares but its net income does not increase, return on common equity will increase.
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