Problem 14-19 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.

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. (Round your answers to 2 decimal places.) b. The dividend yield ratio. The companys stock is currently selling for $50 per share; last year it sold for $45 per share. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) c. The dividend payout ratio. (Do not round intermediate calculations. Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).) d. The price-earnings ratio. (Assume that the industry norm for the price-earnings ratio is 8.) (Do not round intermediate calculations. Round your answers to 2 decimal places.) e. The book value per share of common stock. (Round your answers to 2 decimal places.)

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		This Year		Last Year
a.	Earnings per share	$11.90		$6.65
b.	Dividend yield ratio	4.5	%	4.1	%
c.	Dividend payout ratio		%		%
d.	Price-earnings ratio
e.	Book value per share

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?

You decide next to assess the companys profitability. Compute the following for both this year and last year: a. The gross margin percentage. (Round your percentage answers to 1 decimal place.) b. The net profit margin percentage. (Round your percentage answers to 1 decimal place.) c. The return on total assets. (Total assets at the beginning of last year were $3,024,000.) (Round your percentage answers to 1 decimal place.) d. The return on equity. (Stockholders equity at the beginning of last year was $1,854,000.) (Round your percentage answers to 1 decimal place.) e. Is the companys financial leverage positive or negative?

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		This Year		Last Year
a.	Gross margin percentage		%		%
b.	Net profit margin percentage		%		%
c.	Return on total assets		%		%
d.	Return on equity		%		%
e.	Financial Leverage