Attempts: S Keep the Highest: 5/9 5. Profitability ratios Profitability ratios h

Question

Attempts: S Keep the Highest: 5/9 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 Gadget Twin Inc. and make comments on its second-year performance as compared to its frst-year performance. The folowing shows Gadget Twin Inc.'s income statement for the last two years. The company had assets of $11,750 illin n the fist year and $18,796 illon i 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 ye In addition, the firm did not issue new stock during etther year. ars. Gadget Twin Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1

Explanation / Answer

Gadget Twin Inc Value Ratio Year 2 Year 1 Operating Margin 77.35% 75.20% Profit Margin 41.78% 40.38% Return on Assets 17.37% 17.18% Return on Common Equity 42.45% 32.30% Basic Earning Power 26.13% 32% Operating Margin has increased In second year resulting in more profit in Year 2 Profit Margin has increased In second year There is higher Return on Assets in the second Year Return on Equity has increased Resulting in more Dividends to Equity Share Holders However Basic Earning Power has Decreased in Year 2 Workings: Year 2 Year 1 Operating Margin Operating Income/Net Sales *100 4912/6350*100 3760/5000*100                                         77.35           75.20 Profit Margin Net Income/Net Sales *100 2653/6350*100 2019/5000*100                                         41.78           40.38 Assets in million $18796 $11750 Common Equity in million $6250 $6250 Dividend(100% of Earnings) $2653 $2019 Return on Assets Net Income/Average Total Assets*100 2653/((18796+11750)/2) 2019/11750                                         17.37           17.18 Return on Common Equity Net Income/Common Stock*100 2653/(6250) 2019/(6250)                                         42.45 32.304 Basic Earning Power EBIT /Total Assets*100 4912/18796*100 3760/11750*100                                         26.13 32

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