Problem 14-19 (Algo) Financial Ratios for Assessing Profitability and Market Performance [LO14-5, LO14- 6] Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $660,000 long-term loan from Gulfport State Bank, $180,000 of which will be used to bolster the Cash account and $480,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow. Assets Sabin Electronics Comparative Balance Sheet This Year Last Year Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities Bonds payable, 12% Total liabilities Stockholders' equity: Common stock, $20 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 128,000 $ 310,000 13,000 685,000 1,105,000 34,000 1,952,000 2,061,000 $ 4,013,000 460,000 755,000 38,000 1,576,000 1,450,000 $ 3,026,000 $ 880,000 750,000 1,630,000 850,000 1,533,000 2,383,000 $ 4,013,000 $ 460,000 750,000 1,210,000 850,000 966,000 1,816,000 $ 3,026,000 Sales Sabin Electronics Comparative Income Statement and Reconciliation This Year $ 5,800,000 4,035,000 Cost of goods sold Gross margin Selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes (30%) Net income Common dividends Net income retained Beginning retained earnings Ending retained earnings 1,765,000 685,000 1,080,000 Last Year $ 4,830,000 3,610,000 1,220,000 580,000 640,000 90,000 550,000 90,000 990,000 297,000 165,000 693,000 385,000 126,000 105,000 567,000 280,000 966,000 686,000 $ 1,533,000 $ 966,000 During the past year, the company Introduced several new product lines and raised the selling prices on a number of old product lines In order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 3/10, n/30. All sales are on account. Assume Paul Sabin has asked you to assess his company's profitability and stock market performance. Required: 1. You decide first to assess the company's stock market performance. For both this year and last year, compute: a. The earnings per share. There has been no change in common stock over the last two years. b. The dividend yield ratio. The company's stock is currently selling for $60 per share; last year it sold for $55 per share. c. The dividend payout ratio. d. The price-earnings ratio. (Assume that the Industry norm for the price-earnings ratio is 9) e. The book value per share of common stock. 2. You decide next to assess the company's profitability. Compute the following for both this year and last year: a. The gross margin percentage. b. The net profit margin percentage. c. The return on total assets. (Total assets at the beginning of last year were $2,986,000.) d. The return on equity. (Stockholders' equity at the beginning of last year was $1,806,000.) e. Is the company's financial leverage positive or negative?