Problem 16-19 (Algo) Financial Ratios for Assessing Profitability and Market Performance [LO16-5, LO16-6]

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 $610,000 long-term loan from Gulfport State Bank, $155,000 of which will be used to bolster the Cash account and $455,000 of which will be used to modernize equipment. The company's financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$ 114,000	$ 260,000
Marketable securities	0	29,000
Accounts receivable, net	620,000	410,000
Inventory	1,055,000	705,000
Prepaid expenses	30,000	33,000
Total current assets	1,819,000	1,437,000
Plant and equipment, net	1,977,800	1,480,000
Total assets	$ 3,796,800	$ 2,917,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 855,000	$ 410,000
Bonds payable, 12%	800,000	800,000
Total liabilities	1,655,000	1,210,000
Stockholders' equity:
Common stock, $ 20 par	800,000	800,000
Retained earnings	1,341,800	907,000
Total stockholders' equity	2,141,800	1,707,000
Total liabilities and stockholders' equity	$ 3,796,800	$ 2,917,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales	$ 5,550,000	$ 4,680,000
Cost of goods sold	3,985,000	3,560,000
Gross margin	1,565,000	1,120,000
Selling and administrative expenses	675,000	570,000
Net operating income	890,000	550,000
Interest expense	96,000	96,000
Net income before taxes	794,000	454,000
Income taxes (30%)	238,200	136,200
Net income	555,800	317,800
Common dividends	121,000	100,000
Net income retained	434,800	217,800
Beginning retained earnings	907,000	689,200
Ending retained earnings	$ 1,341,800	$ 907,000

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 $65 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 8)

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 $2,770,000.)

d. The return on equity. (Stockholders' equity at the beginning of last year was $1,697,000.)

e. Is the company's financial leverage positive or negative?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

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.(Round your answers to 2 decimal places.) b. The dividend yield ratio. The company's stock is currently selling for $65 per share; last year it sold for $55 per share.(Do not round intermediate calculations. Round your percentage answers to 1 decimal place.) c. The dividend payout ratio.(Do not round intermediate calculations. Round your percentage answers to 1 decimal place.) 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
b. Dividend yield ratio		%		%
c. Dividend payout ratio		%		%
d. Price-earnings ratio
e. Book value per share

• Required 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.(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 $2,770,000.)(Round your percentage answers to 1 decimal place.) d. The return on equity. (Stockholders' equity at the beginning of last year was $1,697,000.)(Round your percentage answers to 1 decimal place.) e. Is the company's 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