Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 03: Financial Analysis
3-60
CP 3-1. (Continued)
The liquidity ratios also are not encouraging. Both the current and quick
one and one to one respectively.
The debt to total assets ratio is particularly noticeable in regard to
industry comparisons. Lamar Swimwear has gone from being only 6.11
percent over the industry average to 15.13 percent above the norm
(59.23 percent versus 44.10 percent). Their heavy debt position is clearly
company.
Finally, we see that the firm has a slower growth rate in earnings per
share than the industry. This is a function of less rapid growth in
earnings as well as an increase in shares outstanding (with the sale of
8,000 shares in 201Z). Once again, we see that the rapid growth in sales
Investment Comments:
He would probably have difficulty justifying such an investment based
on the performance of the firm. There are no dividend payouts, so return
to the investor would have to come in the form of capital appreciation if
Chapter 03: Financial Analysis
3-61
Comprehensive Problem 2
Sun Microsystems (trends, ratios stock performance) (LO3) Sun Microsystems is a leading
supplier of computer related products, including servers, workstations, storage devices, and
network switches.
In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G.
McNealy offered the following remarks:
Fiscal 2001 was clearly a mixed bag for Sun, the industry, and the economy as a whole. Still,
we finished with revenue growth of 16 percent—and that’s significant. We believe it’s a good
indication that Sun continued to pull away from the pack and gain market share. For that, we
owe a debt of gratitude to our employees worldwide, who aggressively brought costs down—
even as they continued to bring exciting new products to market.
The statement would not appear to be telling you enough. For example, McNealy says the
year was a mixed bag with revenue growth of 16 percent. But what about earnings? You can
delve further by examining the income statement in Exhibit 1. Also, for additional analysis of
other factors, consolidated balance sheet(s) are presented in Exhibit 2 on page 92.
1. Referring to Exhibit 1, compute the annual percentage change in net income per common
share-diluted (second numerical line from the bottom) for 1998–1999, 1999–2000, and
2000–2001.
2. Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years.
Begin with 1998.
3. What is the major reason for the change in the answer for Question 2 between 2000 and
2001? To answer this question for each of the two years, take the ratio of the major
income statement accounts to net revenues (sales).
Cost of sales
Research and development
Selling, general and administrative expense
Provision for income tax
4. Compute return on stockholders’ equity for 2000 and 2001 using data from Exhibits 1
and 2.
In 2009, Sun Microsystems was acquired by Oracle Corporation.
Chapter 03: Financial Analysis
3-62
Comprehensive Problem 2 (Continued)
Exhibit 1
SUN MICROSYSTEMS, INC.
Summary Consolidated Statement of Income (in millions)
2001
2000
1999
1998
Dollars
Dollars
Dollars
Dollars
Net revenues .............................................
$18,250
$15,721
$11,806
$9,862
Costs and expenses:
Cost of sales .......................................
10,041
7,549
5,670
4,713
Research and development .................
2,016
1,630
1,280
1,029
Selling, general and administrative .....
4,544
4,072
3,196
2,826
Goodwill amortization ........................
261
65
19
.4
In-process research and development ..
77
12
121
176
Total costs and expenses ...........................
16,939
13,328
10,286
8,748
Operating Income ......................................
1,311
2,393
1,520
1,114
Gain (loss) on strategic investments ..........
(90)
208
–
–
Interest income, net ...................................
363
170
85
48
Litigation settlement..................................
–
–
–
–
Income before taxes ..................................
1,584
2,771
1,605
1,162
Provision for income taxes ........................
603
917
575
407
Cumulative effect of change
in accounting principle, net ....................
(54)
–
–
–
Net income ................................................
$ 927
$ 1,854
$ 1,030
$ 755
Net income per common share—diluted ....
$ 0.27
$ 0.55
$ 0.31
$ 0.24
Shares used in the calculation of net
income per common share—diluted ..........
3,417
3,379
3,282
3,180
5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b
(all from this chapter) for 2000 and 2001. Actually the answer to ratio 1 can be found as part
of the answer to question 2, but it is helpful to look at it again.
What do you think was the main contributing factor to the change in return on stockholders’
equity between 2000 and 2001? Think in terms of the Du Pont system of analysis.
6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:
1998 11 1/4
1999 16 3/4
2000 28 1/2
2001 9 1/2
a. Computer the price/earnings (P/E) ratio for each year. That is, take the stock price shown
above and divide by net income per common stock-dilution from Exhibit 1.
b. Why do you think the P/E has changed from its 2000 level to its 2001 level?
A brief review of P/E ratios can be found under the topic of Price-Earnings Ratio
Applied to Earnings per Share in Chapter 2.
Chapter 03: Financial Analysis
3-63
Comprehensive Problem 2 (Continued)
Exhibit 2
SUN MICROSYSTEMS, INC
Consolidated Balance Sheets (in millions)
Assets
2001
2000
Current assets:
Cash and cash equivalents ..................................................................
$ 1,472
$ 1,849
Short-term investments .......................................................................
387
626
Accounts receivable, net allowances of $410 in 2001 and
$534 in 2000....................................................................................
2,955
2,690
Inventories .........................................................................................
1,049
557
Deferred tax assets .............................................................................
1,102
673
Prepaids and other current assets ........................................................
969
482
Total current assets ..........................................................................
7,934
6,877
Property, plant and equipment, net .........................................................
2,697
2,095
Long-term investments...........................................................................
4,677
4,496
Goodwill, net of accumulated amortization of $349 in 2001 and
$88 in 2000 ........................................................................................
2,041
163
Other assets, net .....................................................................................
832
521
$18,181
$14,152
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings........................................................................
$ 3
$ 7
Accounts payable ...............................................................................
1,050
924
Accrued payroll-related liabilities .......................................................
488
751
Accrued liabilities and other ...............................................................
1,374
1,155
Deferred revenues and customer deposits ...........................................
1,827
1,289
Warranty reserve ................................................................................
314
211
Income taxes payable .........................................................................
90
209
Total current liabilities .....................................................................
5,146
4,546
Deferred income taxes............................................................................
744
577
Long-term debt and other obligations .....................................................
1,705
1,720
Total debt ........................................................................................
$ 7,595
$ 6,843
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 10 shares authorized (1 share which
has been designated as Series A Preferred participating stock): no
shares issued and outstanding ..........................................................
–
–
Common stock and additional paid-in-capital, $0.00067 par value, 7,200
shares authorized; issued: 3,536 shares in 2001 and 3,495 shares in 2000 ...
6,238
2,728
Treasury stock, at cost: 288 shares in 2001 and 301 shares in 2000 ........
(2,435)
(1,438)
Deferred equity compensation ................................................................
(73)
(15)
Retained earnings ...................................................................................
6,885
5,959
Accumulated other comprehensive income (loss) ...................................
(29)
75
Total stockholders’ equity ....................................................................
10,586
7,309
Chapter 03: Financial Analysis
3-64
$18,181
$14,152
7. The book values per share for the same four years discussed in the preceding question were:
1998 $1.18
1999 $1.55
2000 $2.29
2001 $3.26
a. Compute the ratio of price to book value for each year.
b. Is there any dramatic shift in the ratios worthy of note?
CP 3-2. Solution Sun Microsystems
1. Percentage change in net income per common share-diluted
1999
$ .31
2000
$ .55
2001
$ .27
1998
$ .24
1999
$ .31
2000
$ .55
$ .07
$ .24
$–.28
+29.2%
+77.4%
–50.9%
2. Profit margin
1998 1999 2000 2001
Net income $755 $1,030 $1,854 $927
=
Net revenues 9,862 11,806 15,721 18,250
7.66% 8.72% 11.79% 5.08%
3. Percent of net revenue
2000 2001
Net revenues $15,721 $18,250
Cost of sales 7,549 48.02% 10,041 55.02%
Research and
Chapter 03: Financial Analysis
3-65
CP 3-2. (Continued)
4. Return on stockholders’ equity
2000 2001
Net income $1,854 $ 927
Stockholders' equity 7,309 10,586
=
25.37% 8.76%
5.
2000 2001
1.
Net income
Net revenues (sales)
11.79% 5.08%
Net income
Chapter 03: Financial Analysis
3-66
CP 3-2. (Continued)
6.a. P/E = Stock price/net income per common share-diluted (EPS)
1998 1999 2000 2001
Shares prices $11.25 $16.75 $28.50 $9.50
EPS .24 .31 .55 .27
P/E 46.9 54.0 51.8 35.2
b. The sharp decline in performance caused investors to pay a lower
multiple for the stock.
7.a. Price to book value = Stock price/book value
1998 1999 2000 2001
Shares prices $11.25 $16.75 $28.50 $9.50
Book value 1.18 1.55 2.29 3.26
P/BV 9.53 10.81 12.45 2.91
b. Once again, the sharp fall off in price to book value between 2000
and 2001 can be attributed to the decline in performance (and the
impact on the stock prices). Book value was going up, but the ratio
declined sharply due to the declining stock prices.
Chapter 03: Financial Analysis
3-67
W E B E X E R C I S E
1. IBM was mentioned in the chapter as having an uneven performance. Let’s check this out.
Go to its Web site www.ibm.com, and follow the following steps.
Select “About IBM” on the bottom of the page. Select “Investors” (US) on the next page on
the right side. Select “Financial Snapshot” on the next page.
2. Click on “Stock Chart.” How has IBM’s stock been doing currently?
3. Click on “Financial Snapshot.” Assuming IBM’s historical Price/Earnings Ratio is 15, how
does it currently stand?
4. Assuming its annual dividend yield is 2.5 percent, how does it currently stand?
5. Assuming IBM’s historical “LT (Long-term Debt/Equity) is 100 percent, how does it
currently stand? Generally speaking, is that good or bad?
6. Assuming its historical return on assets is 10 percent, how does it currently stand? Generally
speaking, is that good or bad?
Note: Occasionally a topic we have listed may have been deleted, updated, or moved into a different location on a
Web site. If you click on the site map or site index, you will be introduced to a table of contents which should aid
you in finding the topic you are looking for.
