Question

In: Finance

Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt...

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 Blur Corp. and make comments on its second-year performance as compared to its first- year performance. 

The following shows Blur Corp.'s income statement for the last two years. The company had assets of $11,750 million in the first year and $18,796 million in the second year. Common equity was equal to $6,250 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. 

Blur Corp. 

Income Statement For the Year Ending on December 31 (Millions of dollars) 


Year 2Year 1
Net Sales6,3505,000
Operating costs except depreciation and amortization1,1201,040
Depreciation and amortization318200
Total Operating Costs1,4381,240
Operating Income (or EBIT)4,9123,760
Less: Interest663395
Earnings before taxes (EBT)4,2493,365
Less: Taxes (40%)1,7001,346
Net Income2,5492,019

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

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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 net 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 net profit margin is increasing. 

  • If a company issues new common shares but its net income does not increase, return on common equity will increase.


Solutions

Expert Solution

rate positively..

year 2 year 1
i Net sales         6,350        5,000
ii Operating cost except depreciation and amortization         1,120        1,040
iii Depreciation and amortization            318            200
iv Total operating cost         1,438        1,240
v Operating income (or EBIT)         4,912        3,760
vi Less: Interest            663            395
vii Earning before taxes (EBT)         4,249        3,365
viii Less: Taxes (40%)         1,700        1,346
ix Net income         2,549        2,019
x Total asset =      18,796      11,750
xi Common equity=         6,250        6,250
Ratio
a) = v/i Operating margin 77.35% 75.20%
b)=ix/i net operating margin 40.14% 40.38%
c)=ix/x return on total asset 13.56% 17.18%
d)=ix/xi return on common equity 40.78% 32.30%
e)=v/x Basic earning power 26.13% 32.00%
Ans : Statement 1, 2 and 4 are true .

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