Assignment 04-Analysis of Financial Statements Profitability ratios help in the
ID: 2620486 • Letter: A
Question
Assignment 04-Analysis of Financial Statements 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 Diusitech Inc. and make comments on its second-year performance as compared to its first-year performance The following shows Diusitech Inc.'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. Diusitech Inc. Income Statement For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 5,715 4,500 1,365 1,268 180 1,651 1,448 4,064 3,052 406 397 3,658 2,655 1,463 1,062 2,195 1,593 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 286Explanation / Answer
2nd year Ratio 1st year Ratio Operating margin 4064/5715 71.11% 3052/4500 67.8% Operating profit/sales Profit Margin 2195/5715 38.41% 1593/4500 35.40% Net profit/sales ROA 2195/16916 12.98% 1593/10575 15.06% Net profit/asset ROE 2195/5625 39.02% 1593/5625 28.32% Net profit/equity Earning power 4064/16915 24.03% 1593/10575 15.06% EBIT/Total asset Correct statement-A and B Incorrect statement-C and D statement c is incorrect since operating margin is not impacted by interest and tax statement D is incorrect since new common share will increase equity thereby reducing ROE