Comprehensive Problem: Sun Microsystems

Comprehensive Problem: Sun Microsystems

A complete analysis was conducted on the financial statements and status of Sun Microsystems. After examining the research findings and analysis it is fair to say that evidence determines that Sun Microsystems finances has not been on 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 from the duration of 1998 through 2001. In order to get a concise understanding of where problems are within the company's operations the following factors were considered and examined: the annual percentage change in net income per common share diluted, net income/net revenues, the major income statement accounts to net revenues, return on stockholders' equity, the price/earnings (P/E) ratio, and the book values per share for each year. In order for Sun Microsystems to see a greater return in its bottom line assets it must consider an alternative approach of operating its organization.

The following is a comprehensive view of the finances of Sun Microsystems from 1998-2001. Sun Microsystems has experienced significant fluctuations in performance. The annual percentage change in net income per common share diluted and profit margins were as follows:

Annual Percentage Change Profit Margins

1999 29.2 1998 7.7

2000 77.4 1999 8.7

2001 -50.9 2000 11.8

2001 5.1

Sun Microsystems saw tremendous growth in net income between 1999 and 2000 leading up to a sharp decline between 2000 and 2001. The income statements show increased revenues in 2001, contradicting the data above. Further analysis provides an explanation for the deceleration in income growth in spite of increased revenue. The ratios of several expenses to net revenues were taken for 2000 and 2001.

2000 2001

Cost of Sales 0.48 0.55

Research and Development 0.10 0.11

Selling, General, and Administrative 0.26 0.25

Provision for Income Tax 0.06 0.03

Clearly the cost of sales changed most dramatically and is most responsible for the change in net income. Lower net income also negatively impacted stockholders' equity, which dropped from 0.25 in 2000 to 0.09 in 2001. 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 over the four-year span from 1998-2001.

1998 1999 2000 2001

P/E 46.9 54.0 51.8 35.2

The lower P/E in 2001 suggests again that the return on stockholders' investment is small for the amount of revenue generated in that year and stock prices will decline accordingly since P/E multiplied by earnings per share determines stock price. Finally, consider the ratio of price (stock price) to book value (net worth per share) from 1998 to 2001.

1998 1999 2000 2001

Price/Book 9.5 10.8 12.4 2.9

The price/book ratio shows that the stock at Sun Microsystems was not as highly valued in the market in 2001. The difference between the net worth per share of the company and what the company is able to sell shares for greatly decreased. Changes in the industry as a whole or changes in consumer habits could be contributing factors to the change in stock values experienced at Sun Microsystems. Internally, Sun Microsystems needs to explore ways to maximize profit and minimize costs of producing goods.

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