Comprehensive Problem: Sun Microsystems

Comprehensive Problem: Sun Microsystems

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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.

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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 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.

Table 5
Price to book value = Stock price/book value
1998 1999 2000 2001
P/BV 9.53 10.81 12.45 2.91

Once again, the sharp fall off in price to book value between 2000 and 2001 can be attributed to the decline in performance (and the impact on the stock prices). Book value was going up, but the ratio declined sharply due to the declining stock prices. 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.
Business Alternatives
Looking at the financial statement analysis for Sun Microsystems, one can definitely see the company’s strengths and their needs. The balance sheet indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest and the statement of income is the major device for measuring the profitability of a firm over time (Block and Hirt, 2005, p.25, 28). The financial statements analysis shows that Sun Microsystems has done very well and made it through the challenge from 2000 to 2001. The stock prices dropped drastically from 2000 to 2001 and there was a huge increase in cost of sales resulting in the recommendation to outsource some of their employees to compensate for some deficit. Sun Microsystems is a very aggressive company and the employees have fought to bring the costs down as they continued to bring exciting new products to the market (Block and Hirt, 2005, p. 82). Outsourcing will allow Sun Microsystems to put more concentration into the products that they have while they make sure they have all their finances in order for the years to come.
The revenue growth of 16% for Sun Microsystems was very significant for the business (Block and Hirt, 2005, p.82). Outsourcing some employees gives Sun Microsystems an opportunity to have a consulting firm come in and evaluate their business plan. This business plan will potentially lead Sun Microsystems to long lasting success. “A business plan renews their vision, strategic focus and adds value to their target market segments. It also provides the systematic plan for improving sales, gross margin, and profitability” (Bplans.com, 2007).
Conclusion
Sun Microsystems needs to implement a new plan quickly to save its company from going under as its stockholders’ equity continues to decrease. It has experienced a decline in its net income between 2000 and 2001. The P/E in 2001 determined that the return on stockholders’ investment was rather small when compared to the amount of revenue it generated. Stock prices also declined. Not all changes were specific to Sun Microsystems, as some of these changes were industry wide. If Sun Microsystems was to outsource some of its employees, the money saved overall would appeal to its stockholders. Consequently, outsourcing will allow for more emphasis and focus on product development, which can ultimately increase revenue. Sun Microsystems should consider bringing in a consulting firm to look at its current business plan. Potentially, by doing so, the consulting firm can sift through possible problems and replace them with solutions. Restructuring the business plan will bring a newfound energy to the company by renewing its vision and focusing on the appropriate market segment.

References
Block, S. B., & Hirt, G. A. (2005). Foundations of Financial Management. [University of Phoenix Custom Edition e-text]. New York: McGraw-Hill. Retrieved April 26, 2007, from University of Phoenix, rEsource, MBA503-Introduction to Finance and Accounting Course Web site.
Bplans.com. (2007). Executive summary. Retrieved May 5, 2008, from http://www.bplans.com
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