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 $520,000 long-term loan from Gulfport State Bank, $110,000 of which will be used to bolster the Cash account and $410,000 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	$ 78,000	$ 170,000
Marketable securities	0	20,000
Accounts receivable, net	503,000	320,000
Inventory	965,000	615,000
Prepaid expenses	22,000	24,000
Total current assets	1,568,000	1,149,000
Plant and equipment, net	1,503,800	1,350,000
Total assets	$ 3,071,800	$ 2,499,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 810,000	$ 450,000
Bonds payable, 12%	700,000	700,000
Total liabilities	1,510,000	1,150,000
Stockholders' equity:
Common stock, $20 par	710,000	710,000
Retained earnings	851,800	639,000
Total stockholders equity	1,561,800	1,349,000
Total liabilities and stockholders' equity	$ 3,071,800	$ 2,499,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales	$ 5,100,000	$ 4,410,000
Cost of goods sold	3,895,000	3,470,000
Gross margin	1,205,000	940,000
Selling and administrative expenses	657,000	552,000
Net operating income	548,000	388,000
Interest expense	84,000	84,000
Net income before taxes	464,000	304,000
Income taxes (30%)	139,200	91,200
Net income	324,800	212,800
Common dividends	112,000	91,000
Net income retained	212,800	121,800
Beginning retained earnings	639,000	517,200
Ending retained earnings	$ 851,800	$ 639,000

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 $46 per share.

c. The dividend payout ratio.

d. The price-earnings ratio. (Assume that the industry norm for the price-earnings ratio is 10)

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 $2,360,000.)

d. The return on equity. (Stockholders equity at the beginning of last year was $1,339,000.)

e. Is the companys financial leverage positive or negative?