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 $650,000 long-term loan from Gulfport State Bank, $175,000 of which will be used to bolster the Cash account and $475,000 of which will be used to modernize equipment. The companys financial statements for the two most recent years follow: Sabin Electronics Comparative Balance Sheet This Year Last Year Assets Current assets: Cash $ 130,000 $ 300,000 Marketable securities 0 12,000 Accounts receivable, net 672,000 450,000 Inventory 1,095,000 745,000 Prepaid expenses 34,000 37,000 Total current assets 1,931,000 1,544,000 Plant and equipment, net 2,099,400 1,520,000 Total assets $ 4,030,400 $ 3,064,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 875,000 $ 450,000 Bonds payable, 12% 750,000 750,000 Total liabilities 1,625,000 1,200,000 Stockholders' equity: Common stock, $15 par 840,000 840,000 Retained earnings 1,565,400 1,024,000 Total stockholders equity 2,405,400 1,864,000 Total liabilities and stockholders' equity $ 4,030,400 $ 3,064,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales $ 5,750,000 $ 4,800,000 Cost of goods sold 4,025,000 3,600,000 Gross margin 1,725,000 1,200,000 Selling and administrative expenses 683,000 578,000 Net operating income 1,042,000 622,000 Interest expense 90,000 90,000 Net income before taxes 952,000 532,000 Income taxes (30%) 285,600 159,600 Net income 666,400 372,400 Common dividends 125,000 104,000 Net income retained 541,400 268,400 Beginning retained earnings 1,024,000 755,600 Ending retained earnings $ 1,565,400 $ 1,024,000 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 2/10, n/30. All sales are on account. Assume Paul Sabin has asked you to assess his companys profitability and stock market performance. Required: 1. You decide first to assess the companys 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 companys stock is currently selling for $50 per share; last year it sold for $45 per share. c. The dividend payout ratio. d. The price-earnings ratio. (Assume that the industry norm for the price-earnings ratio is 8) e. The book value per share of common stock. 2. You decide next to assess the companys 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 $3,024,000.) d. The return on equity. (Stockholders equity at the beginning of last year was $1,854,000.) e. Is the companys financial leverage positive or negative?