David S.Y. Wong asked:




With the doubling of the JAVA stock price on March 18, 2009 based on a Wall Street Journal report that IBM is bidding to buy Sun Microsystems, and with the StockTradersPlace sell action commentary on March 21, one open question is “Should the stock be shorted?”. Here is where other factors have to be considered beyond technical analysis. With speculation that other companies such as Hewlett-Packard (HPQ) and Cisco Systems (CSCO), among others, may want to buy Sun Microsystems, a bidding war can emerge. For this reason, it is probably risky to short the stock at this point, although selling the long position holding is the prudent thing to do.

I continue to be amused by corporate acquisitions and the price paid for such actions. I was involved in such a scenario in 2001 (at the onset of the tech/telecommunications industry meltdown) where the company I was working for ballooned to 95,000 employees largely on the contribution of various corporate acquisitions leading up to year 2001. Today, that company has less than 32,000 employees and has filed for bankruptcy protection.

The previous paragraph was not meant to suggest a similar fate for IBM but was simply old memories coming to the fore as this Sun Microsystems acquisition is being reported. The price is high at $8B. There will be corporate culture clashes and integration issues, as well as clear conflicts in technology in terms of Intel and Advanced Micro Devices microprocessors used in IBM server products versus the Sun Microsystems SPARC architecture microprocessors.

And what is the latest craze with Sun Microsystems anyway? Well, Sun’s legacy is in engineering workstations and server products. But in 2007, Sun changed its stock symbol from SUNW to JAVA to clearly re-orient the company strength and leadership in the JAVA programming language. As significant as the JAVA technology is to the Web computing industry, one must continue to question how they intend to make money from this. As an investor/trader, that is the most important question to answer.

It will be very interesting indeed to see how this unfolds if IBM does end up acquiring Sun Microsystems. Will IBM then customize JAVA for its own internal purposes, thereby creating a potential issue with the open JAVA standard? How does IBM intend to recover the $8B spent predominantly on the acquisition of the JAVA technology which rightly belongs in the domain of open standards.

As an investor/trader of JAVA now and IBM now and in the future, the company fundamentals are extremely important to analyze beyond the technical analysis indicators. This is the time to avoid being over-focused on technical analysis alone.

StockTradersPlace (http://stocktradersplace.com) provides a trend following system based on candlestick technical analysis. http://stocktradersplace.blogspot.com provides a “Stock Trading with StockTradersPlace” companion guide. Empower yourself and show that you can repeatedly execute winning trades using StockTradersPlace as an element of your trading tool box. StockTradersPlace provides viewable demo stocks for guest users and a 14-day free trial for sign-up to view all supported stocks.

Copyright © Mar 2009 StockTradersPlace.com

Christina Pomoni asked:




The operating performance of a firm is examined with the use of operating efficiency ratios. Efficiency ratios scan how the firm uses its assets and capital measured by dollars of sales generated by various asset and capital components.  

Total Asset Turnover ratio indicates the effectiveness of the firm’s use of its total asset base and it is calculated as follows:

Total Asset Turnover = Net Sales / Average Total Net Assets 

In order to depict the firm’s operating performance, Total Asset Turnover ratio should always be compared to the industry average because it varies greatly between different industries. In capital-intensive industries (steel, autos and heavy manufacturing companies) Total Asset Turnover ratio is typically less than one, while in retail and services companies it may be over ten. 

In addition, Total Asset Turnover ratio reflects a range of turnover values consistent within the industry. For example, a high Total Asset Turnover ratio relative to the industry average might imply that the firm does not generate a sufficient volume of business (sales) given its total asset investment because is tying up capital in excess assets relative to the needs of the firm and its competitors. Also, a high Total Asset Turnover ratio relative to the industry average might be the result of using outdated, obsolete and fully depreciated assets which does not generate high sales volumes.  

Example

We need to calculate the Total Asset Turnover ratio of firm X, which is a big retailer. 

Our inputs are: 

Net Sales = 32,500$ ml

Net Assets (current year) = 11,400$

Net Assets (previous year) = 9,800$

Average Net Assets = (11,400$ + 9,800$) / 2 = 10,650$ 

Plugging above figures to the formula we derive: 

Total Asset Turnover ratio = 32,500 / 10,650 = 3.05 times

If he industry average is lower than 3.05r, then firm X generates a sufficient volume of business (sales) given its total asset investment.

If the industry average is higher than 3.05r, then firm X does not generate a sufficient volume of business (sales) given its total asset investment. 

Other implications

Beyond analyzing a firm’s total asset base, it is useful to focus on fixed assets, receivables and inventories in order to evaluate Total Asset Turnover ratio. This is important especially if a firm has experienced a major decline in its total assets turnover as a result of a decline in any of the component turnovers. For example, an exceedingly high fixed assets turnover might indicate a lack of productive capacity to meet sales. Also, a high receivables turnover expresses a great deviation of a firm from the industry norm indicating that the firm collects its receivables in a greatly longer period than what competitors do and this affects its liquidity efficiency by increasing the capital tied up and the possibility of bad debts. Finally, an abnormally high inventory turnover may indicate inadequate inventory that could lead to backorders and slow delivery to customers, having eventually an adverse effect on sales. Therefore, in order to measure how effectively a firm is managing its assets, analyst should consider above component turnovers.