Cash Analysis

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 changes in stock prices were as follows:

Increase/Decrease in net income per common share diluted Change in stock prices

1998 - 1999 7% Increase 24 to 31 cents on the dollar

1999 - 2000 24% Increase from 31 to 55 cents on the dollar

2000 - 2001 (28%) Decrease 55 to 27 cents on the dollar

The table below shows the computed net income / net revenue (sales) for each of the four years beginning with 1998.

Year Net Income Net Revenue Net Ratio

1998 $755 $9,862 1: 13.06

1999 $1,030 $11,806 1: 11.46

2000 $1,845 $15,721 1: 8.48

2001 $927 $18,250 1: 19.69

What is the major reason for the change in the answer for question two between 2000 and 2001? We can use a horizontal Analysis concentrating on four major areas to answer this question as presented in the table below.

Sun Microsystems Inc.

Income Statement (Partial)

2001Millions 2000Millions Increase/decrease Amount Percentage

Net Revenue 18,250 15,721 2,529 16%

Costs of Sales 10,041 7,549 2,492 33%

Research and development 2,016 1,630 386 24%

Selling, general and administrative 4,544 4,072 472 16%

Provision for income taxes 603 917 (314) (52%)

This shows the major reason for the difference in the answer for question two between 2000 and 2001 is the increase in costs and expenses exceeded the increase in net revenue. As shown by the above analysis although we had an increase in Net Revenue (16%) and a decrease in provisions for income taxes (52%) costs of sales also increased (33%) as did research and development (24%) and selling general and administrative (16%). Management needs to analyze these figures and implement process improvements where needed.

The return on stockholder's equity decreased from 25.36% in 2000 to 8.75% in 2001 as the company's net income was twice as much in 2001. This decrease in stockholder's equity reduces the amount of surplus funds for investment in other areas of the company. A higher return on equity means that surplus funds can be invested to improve business operations without the owners of the business (stockholders) having to invest more capital. It also means that there is less need to borrow (Buffett, 2007, page 1).

2001Millions 2000Millions

Net Income 927 1,854

Net worth 10,586 7,309

Return on Stockholder's equity (Net income/Net worth) 8.75% 25.36%

A more thorough analysis of these results can be conducted by examining profitability ratios for the years 2000 and 2001. The main contributing factor to the decline in the return on stockholders' equity (27.66% to 12.48%) 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%).

2001Millions 2000Millions

Net Income 927 1,854

Sales 18,250 15,721

Total Assets 18,181 14,152

Total Debt 7,595 6,843

Profit Margin (net income/sales) 5.07% 11.79%

Return on Assets #a (net income/total assets) 5.09% 13.10%

Return on Assets #b (net income/sales) x (sales/total assets) 5.07% 13.09%

Return on equity #b (return on assets/(1-debt/assets) 12.48% 27.66%

6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:

1998 11 ј

1999 16 Ñ*

2000 28 Ð...

2001 9 Ð...

a. Compute the price/earnings (P/E) ratio for each year. That is, take the stock price shown above and divide by net income per common stock dilution from Exhibit 1.

b. Why do you think the P/E has changed from its 2000 level to its 2001 level? A brief review of P/E ratios can be found under the topic of Price Earnings Ratio Applied to Earnings per Share in Chapter 2.

7. The book values per share for the same four years discussed in the preceding question were:

1998 $1.18

1999 $1.55

2000 $2.29

2001 $3.26

a. Compute the ratio of