Comprehensive Problem: Sun Microsystems

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 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 numbers were examined. In order for Sun Microsystems to see a greater return in its bottom line assets, it must consider an alternative approach in 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:

Table 1

Percentage change in net income per common share-diluted

1999 $ .31 2000 $ .55 2001 $ .27

1998 $ .24 1999 $ .31 2000 $ .55

$ .07 $ .24 $-.28

+29.2% +77.4% -50.9%

Table 2

Profit Margin

1998 1999 2000 2001

7.66% 8.72% 11.79% 5.08%

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 of income growth in spite of increased revenue. The ratios of several expenses to net revenues were taken for 2000 and 2001.

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.