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Newman Industries is a leading supplier of cosmetics.

In the letter to stockholders as part of the 2008 annual report, President and CEO Jennifer White offered the following remarks:

Fiscal 2008 was clearly a mixed bag for Newman, the industry, and the economy as a whole.

Still, we finished with revenue growth of 15 percentand thats significant. We believe its a good indication that Newman continued to pull away from the pack and gain market share. For that, we owe a debt of gratitude to our employees worldwide, who aggressively brought costs down even as they continued to bring exciting new products to market.

The statement would not appear to be telling you enough. For example, Chauhan says the year was a mixed bag with revenue growth of 15 percent. But what about earnings? You can delve further by examining the income statement in Exhibit 1. Also, for additional analysis of other factors, consolidated balance sheet(s) are presented in Exhibit 2 on page 92.

1. Referring to Exhibit 1, compute the annual percentage change in net income per common share-diluted (second numerical line from the bottom) for 20052006, 20062007, and 20072008.
2. Also in Exhibit 1, compute net income/net revenue (sales) for each of the four years. Begin with 2005.
3. What is the major reason for the change in the answer for Question 2 between 2007 and 2008? To answer this question for each of the two years, take the ratio of the major income statement accounts to net revenues (sales).

Cost of sales

Research and development

Selling, general and administrative expense

Provision for income tax

4. Compute return on stockholders equity for 2007 and 2008 using data from Exhibits 1 and 2.

Exhibit 1

Newman Industries Summary Consolidated Statement of Income (in millions) 2008 2007 2006				2005
	Dollars	Dollars	Dollars	Dollars
Net revenues ...............................................	$17,125	$14,610	$10,705	$8,751
Costs and expenses: Cost of sales .........................................	9,030	6,438	4,569	3,602
Research and development ..................	1,015	1,529	1,179	918
Selling, general and administrative ......	3,433	3,061	2,085	1,715
Goodwill amortization .........................	150	54	11	1
In-process research and development ..	66	9	75	106
Total costs and expenses .............................	13,694	11,091	7,919	6,342
Operating Income .......................................	3,431	3,519	2,786	2,409
Gain (loss) on strategic investments ...........	(80)	107
Interest income, net .....................................	252	69	75	37
Litigation settlement ...................................
Income before taxes ....................................	3,603	3,695	2,861	2,446
Provision for income taxes .........................	502	806	464	306
Cumulative effect of change in accounting principle, net .....................	(54)
Net income ..................................................	$ 3,047	$ 2,889	$ 2,397	$ 2,140
Net income per common sharediluted ....	$ 1.32	$ 1.27	$ 1.10	$ 1.03
Shares used in the calculation of net income per common sharediluted ...........	2,316	2,268	2,171	2,079

5. Analyze your results to Question 4 more completely by computing ratios 1, 2a, 2b, and 3b (all from this chapter) for 2007 and 2008. Actually, the answer to ratio 1 can be found as part of the answer to question 2, but it is helpful to look at it again.

What do you think was the main contributing factor to the change in return on stockholders equity between 2007 and 2008? Think in terms of the Du Pont system of analysis.

6. The average stock prices for each of the four years shown in Exhibit 1 were as follows:
   2005. 11
   2006. 16
   2007. 28
   2008. 9

1. 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.
2. Why do you think the P/E has changed from its 2007 level to its 2008 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.

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