Profitability ratios help in the analysis of the combined impact of liquidity ra

Question

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 to its first-year performance The following shows Petroxy Oil Co.'s income statement for the last two years. The company had assets of $10,575 million in the first year and $16,916 million in the second year. Common equity was equal to $5,625 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 5,715 1,855 286 2,141 3,574 357 3,217 1,287 1,930 Year 1 4,500 1,723 180 1,903 2,597 338 2,259 904 1,355 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 (40%) Net Income

Explanation / Answer

Question relating to " petroxi Oil Company" calculating profitability ratios Operating margin for year 2 Operating margin for year 2 = Operating income for year 2 / Total sales for year 2    *100   =$3574 /$5715   *100 =62.54% Return on total Assets for year 2 Return on total assets for year 2 = net income / Total Assets for year 2 *100 =$1930/$16916   *100 =11.41% Return on Common Equity Return on common equity = Net income / Equity share capital for seconfd year *100 =$1930/$5625   *100 =34.31% Profit margin for the first year Profit margin for the first year = net profit / Net sales *100 =$1355/$4500 *100 =30.11% basic Earning power for th first year = EBIT / Total Assets *100 =$2597/$10575 *100 =24.56% Table Showing Profitability ratios Year2 Year1 Operating margin 62.54% 57.71% profit margin 33.77% 30.11% Return on Total Assets 11.41% 12.81% Return on Common Equity 34.31% 24.09% basic Earining Power 21.13% 24.56%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.