Comprehensive Problem: Sun Microsystems Essay

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Running head: COMPREHENSIVE PROBLEM: SUN MICROSYSTEMS Comprehensive Problem: Sun Microsystems A complete analysis conducted on the financial statements and status of Sun Microsystems exposed key issues determined to be of great import to shareholders. After examining the research findings and analysis, it seems that Sun Microsystems finances have not maintained a steady incline. In fact, it had definitely experienced some highs and lows in its return on investment and stockholders’ equity over a four- year evaluation spanning the years 1998 through 2001. In an effort to decipher the problems within the company’s operations, data from the following reports and ratios offered considerable clues. To collect relevant data, the annual …show more content…

Table 3 Percent of net revenue 2000 2001 Net revenues $15,721 $18,250 Cost of sales $7,549 48.02% $10,041 55.02% Research and development 1,630 10.37 2,016 11.05 S, G, and A 4,072 25.90 4,544 24.90 Provision for income taxes 917 5.83 603 3.30 The main contributing factor to the decline in the return on stockholders’ equity (25.37% to 8.73%) was the decline in the profit margin (11.79% vs. 5.08%). The decrease in asset turnover (1.11 to 1.00) made a small contribution to the decline, as did the decline in the debt ratio (48.4% to 41.8%). Ratios for return on assets and return on equity offer support for the loss in stockholders’ equity. Return on assets went from 13.1 in 2000 to 5.1 in 2001 and return on equity dropped from 25.4 in 2000 to 8.7 in 2001. Return on equity represents return on assets divided by the difference of 1 and debts/assets. This supports the conclusion that cost of sales, a reflection of asset investment, is most responsible for the lackluster net income of 2001. The price/earnings (P/E) ratio further demonstrates the fluctuation in value to stockholders from 1998 to 2001. Table 4 P/E = Stock price/net income per common share-diluted (EPS) 1998 1999 2000 2001 P/E 46.9 54.0 51.8 35.2 The sharp decline in performance caused investors to pay a lower multiple for the stock. The lower P/E in 2001 suggests again that the return on stockholders’ investment is small for revenue generated in that year and stock prices will decline

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