Financial Analysis Homework
Business 4385, Dr. Norman
Financial Analysis of Gateway Inc.
50 points
Due: Beginning of class on Wednesday, January 23rd.
Instructions: I encourage you to use an Excel or another spreadsheet to calculate the ratios in Question 1. If you calculate them manually, you may handwrite your results. Regardless of the method used, show the formula used to calculate the ratio and show your calculations using numbers from the financial statements. Your answer to Question 2 must be typed and should not exceed one (1) typed, single-spaced page.
Evaluation: Question 1 will be evaluated according to your calculation of the ratios. Question 2 will be evaluated by how thoroughly you answer the question and by the logic and support provided for your arguments. In addition, grammar, spelling, and the organization of your answer will all be considered.
1. Using the income statements and balance sheets provided, calculate the following financial ratios for Gateway Inc. for the most recent three full years shown (2000, 1999, and 1998) and for the nine-month period ending on 9/30/01. Show both your answer and how you calculated your answer.
· Profitability Ratios
· Return on Total Assets
· Return of Stockholder’s Equity
· Operating Profit Margin
· Net Profit Margin
· Liquidity Ratios
· Current Ratio
· Quick Ratio
· Leverage Ratios
· Debt-To-Assets
· Debt-to-Equity
· Activity Ratios
· Inventory turnover
· Fixed assets turnover
· Total assets turnover
· Average collection period
· Shareholder’s Return Ratios
· Earnings per share
· Other Ratios of Interest
· Cost of Goods Sold/Sales (amount per sales dollar spent on producing a good)
· SG&A (Selling, General, & Administrative Expenses)/Sales (amount per sales dollar spent on overhead expenses)
2. Provide an overall assessment of Gateway’s financial health. Which of the ratios may indicate problems? For these, explain the potential problems. Because the financial ratios are usually symptoms of deeper problems, use the following sources (attached) to better analyze the potential problems:
“Can Gateway Round Up the Suits?” Business Week, 5/26/97
“Gateway Loses the Folksy Shtick,” Business Week, 7/6/98
“A Net Gain for Gateway?” Business Week, 7/19/99
“Top of the News: Can Gateway Pull It Off?” Forbes.com, 8/29/01
“Gateway’s Opportunity,” Forbes.com, 9/4/01
GATEWAY INC / ANNUAL INCOME STATEMENTTICKER: GTW / ($ MILLIONS, EXCEPT PER SHARE)
SIC: 3571
GICS: 45202010
Dec-00 / Dec-99 / Dec-98 / Dec-97 / Dec-96
Sales / 9600.6 / 8645.561 / 7467.925 / 6293.68 / 5035.228
Cost of Goods Sold / 7352.522 / 6611.639 / 5816.127 / 5130.465 / 4009.838
------/ ------/ ------/ ------/ ------
Gross Profit / 2248.078 / 2033.921 / 1651.798 / 1163.215 / 1025.39
Selling, General, &
Administrative Expense / 1528.601 / 1304.147 / 1052.047 / 786.168 / 607.533
------/ ------/ ------/ ------/ ------
Operating Income Before Deprec. / 719.477 / 729.775 / 599.751 / 377.047 / 417.857
Depreciation, Depletion, &
Amortization / 189.084 / 134.105 / 105.524 / 86.774 / 61.763
------/ ------/ ------/ ------/ ------
Operating Profit / 530.393 / 595.67 / 494.227 / 290.273 / 356.094
Interest Expense
Non-Operating Income/Expense / -102.693 / 67.809 / 47.021 / 27.189 / 26.622
Special Items / -19.1 / 0 / 0 / -113.842 / 0
------/ ------/ ------/ ------/ ------
Pretax Income / 408.6 / 663.479 / 541.248 / 203.62 / 382.716
Total Income Taxes / 155.266 / 235.535 / 194.849 / 93.823 / 132.037
Minority Interest / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Income Before Extraordinary
Items & Discontinued Operations / 253.334 / 427.944 / 346.399 / 109.797 / 250.679
Preferred Dividends / 0 / 0 / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Available for Common / 253.334 / 427.944 / 346.399 / 109.797 / 250.679
Savings Due to Common
Stock Equivalents / 0 / 0 / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Adjusted Available for Common / 253.334 / 427.944 / 346.399 / 109.797 / 250.679
Extraordinary Items / -11.851 / 0 / 0 / 0 / 0
Discontinued Operations / 0 / 0 / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Adjusted Net Income / 241.483 / 427.944 / 346.399 / 109.797 / 250.679
Earnings Per Share Basic -
Excluding Extra Items & Disc Op / 0.79 / 1.36 / 1.12 / 0.35 / 0.8
Earnings Per Share Basic -
Including Extra Items & Disc Op / 0.75 / 1.36 / 1.12 / 0.35 / 0.8
Earnings Per Share Diluted-
Excluding Extra Items & Disc Op / 0.76 / 1.32 / 1.09 / 0.35 / 0.8
Earnings Per Share Diluted -
Including Extra Items & Disc Op / 0.73 / 1.32 / 1.09 / 0.35 / 0.8
EPS Basic from Operations / 0.83 / 1.36 / 1.12 / 0.59 / 0.8
EPS Diluted from Ops / 0.8 / 1.32 / 1.09 / @NA / @NA
Dividends Per Share / 0 / 0 / 0 / 0 / 0
Com Shares for Basic EPS / 321.742 / 313.974 / 311.084 / 307.68 / 312.464
Com Shares for Diluted EPS / 331.32 / 324.421 / 317.858 / 312.402 / @NA
GATEWAY INC / ANNUAL BALANCE SHEET
TICKER: GTW / ($ MILLIONS)
SIC: 3571
GICS: 45202010
Dec-00 / Dec-99 / Dec-98 / Dec-97 / Dec-96
ASSETS
Cash & Equivalents / 614.07 / 1336.371 / 1328.467 / 632.249 / 516.36
Net Receivables / 544.755 / 646.339 / 558.851 / 510.679 / 449.723
Inventories / 315.069 / 191.87 / 167.924 / 249.224 / 278.043
Prepaid Expenses / 0 / 0 / 0 / 0 / 0
Other Current Assets / 793.166 / 522.225 / 172.944 / 152.531 / 74.216
------/ ------/ ------/ ------/ ------
Total Current Assets / 2267.06 / 2696.805 / 2228.186 / 1544.683 / 1318.342
Gross Plant, Property & Equipment / 1308.696 / 1092.004 / 765.578 / 453.304 / 324.479
Accumulated Depreciation / 411.282 / 346.344 / 234.59 / 116.835 / 82.114
------/ ------/ ------/ ------/ ------
Net Plant, Property & Equipment / 897.414 / 745.66 / 530.988 / 336.469 / 242.365
Investments at Equity / 0 / 0 / 0 / 0 / 0
Other Investments / 0 / 0 / 0
Intangibles / 165.914 / 52.302 / 65.944 / 82.59 / @CF
Deferred Charges / 0 / 0 / 0 / 0 / 0
Other Assets / 822.156 / 459.921 / 65.262 / 75.529 / 112.704
------/ ------/ ------/ ------/ ------
TOTAL ASSETS / 4152.544 / 3954.688 / 2890.38 / 2039.271 / 1673.411
LIABILITIES
Long Term Debt Due In One Year / 0 / 5.49 / 11.415 / 13.969 / 15.041
Notes Payable / 0 / 0 / 0 / 0 / 0
Accounts Payable / 785.345 / 898.436 / 718.071 / 488.717 / 411.788
Taxes Payable / 0 / 0 / 0 / 26.51 / 40.334
Accrued Expenses / 694.769 / 762.972 / 583.138 / 430.668 / 316.032
Other Current Liabilities / 150.92 / 142.812 / 117.05 / 44.042 / 16.574
------/ ------/ ------/ ------/ ------
Total Current Liabilities / 1631.034 / 1809.71 / 1429.674 / 1003.906 / 799.769
Long Term Debt / 0 / 2.998 / 3.36 / 7.24 / 7.244
Deferred Taxes
Investment Tax Credit / 0 / 0 / 0 / 0 / 0
Minority Interest / 0 / 0 / 0 / 0
Other Liabilities / 141.171 / 124.862 / 112.971 / 98.081 / 50.857
EQUITY
Preferred Stock - Redeemable / 0 / 0 / 0 / 0 / 0
Preferred Stock - Nonredeemable / 0 / 0 / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Total Preferred Stock / 0 / 0 / 0 / 0 / 0
Common Stock / 3.239 / 3.2 / 1.566 / 1.541 / 0.768
Capital Surplus / 741.646 / 656.87 / 365.986 / 299.483 / 289.512
Retained Earnings / 1657.402 / 1408.844 / 976.823 / 629.02 / 525.261
Less: Treasury Stock / 21.948 / 51.796 / 0 / 0 / 0
------/ ------/ ------/ ------/ ------
Common Equity / 2380.339 / 2017.118 / 1344.375 / 930.044 / 815.541
------/ ------/ ------/ ------/ ------
TOTAL EQUITY / 2380.339 / 2017.118 / 1344.375 / 930.044 / 815.541
------/ ------/ ------/ ------/ ------
TOTAL LIABILITIES & EQUITY / 4152.544 / 3954.688 / 2890.38 / 2039.271 / 1673.411
COMMON SHARES OUTSTANDING / 323.403 / 319.286 / 313.138 / 308.256 / 307.024
GATEWAY INC
INCOME STATEMENT
($ Millions, except per share)
Nine months ended / Nine months ended
September 30, 2001 / September 30, 2000
Net sales / 4,944,144 / 7,154,257
Cost of goods sold / 4,346,673 / 5,557,687
------/ ------
Gross profit / 597,471 / 1,596,570
Selling, general, and administrative expenses / 1,782,117 / 1,060,025
------/ ------
Operating income (loss) / (1,184,646) / 536,545
Other income (loss), net / (113,755) / 54,935
------/ ------
Income (loss) before income taxes and / (1,298,401) / 591,480
cumulative effect of change in accounting
principle
Provision (benefit) for income taxes / (278,900) / 209,973
------/ ------
Net income (loss) before cumulative effect of / (1,019,501) / 381,507
change in accounting principle
Cumulative effect of change in accounting / (23,851) / (11,851)
principle, net of tax
------/ ------
Net income (loss) / (1,043,352) / 369,656
Net income (loss) per share before cumulative
effect of change in accounting principle:
Basic / ($3.16) / $1.19
Diluted / ($3.16) / $1.15
Net income (loss) per share:
Basic / ($3.23) / $1.15
Diluted / ($3.23) / $1.11
Weighted average shares outstanding:
Basic / 323,061 / 321,221
Diluted / 323,061 / 332,348
GATEWAY INC
BALANCE SHEET
($ Millions)
September 30, 2001
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents / 553,349
Marketable securities / 382,463
Accounts receivable, net / 322,702
Inventory / 126,412
Other / 398,070
------
Total current assets / 1,782,996
Property, plant and equipment, net / 635,355
Intangibles, net / 39,866
Other assets / 545,746
------
Total Assets / 3,003,963
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable / 453,924
Accrued liabilities / 666,590
Accrued royalties / 114,829
Other current liabilities / 128,954
------
Total current liabilities / 1,364,297
Long-term obligations, net of current maturities / 201,261
Warranty and other liabilities / 96,963
------
Total liabilities / 1,662,521
Stockholders' equity:
Preferred stock, $.01 par value, 5000 shares authorized;
none issued and outstanding
Class A common stock, nonvoting, $.01 par value, 1,000
shares authorized; none issued and outstanding
Common stock, $.01 par value, 1,000,000 authorized; / 3,240
323,962 shares issued in 2001
Additional paid-in capital / 732,859
Retained earnings / 609,983
Accumulated other comprehensive income (loss) / -1,640
------
Total stockholders' equity / 1,344,442
------
Total liabilities and equity / 3,006,963