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Question: permanent versus transitory earnings entrust inc is a global provider...

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Permanent Versus Transitory Earnings

Entrust, Inc., is a global provider of security software; it operates in one business segment involving the design, production, and sale of software products for securing digital identities and information. The consolidated statements of operations for a three-year period (all values in thousands) follows. On January 1, Year 1, the Entrust common shares traded at $10.40 per share; by year end Year 3, the shares traded at $3.80 per share. The company’s cash flow from operations was $(27,411), $(20,908), and $9,606, for Year 1, Year 2, and Year 3, respectively.
Calculate the sustainable earnings of Entrust, Inc., for each of the three years. Compare the company’s reported net income (loss) with its sustainable earnings. Does Entrust’s share price at year-end Year 3 reflect the firm’s apparent turn-around? Why or why not?

ENTRUST, INC.

Consolidated Statements of Operations

Year Ended December 31 ($ thousands)

Year 3

Year 2

Year 1

Revenues

Product

$30,395

$32,074

$45,834

Services and maintenance

61,662

56,920

58,013

Total revenues

92,057

88,994

103,847

Cost of Revenues

Product

$ 4,239

$ 5,431

$ 5,371

Services and maintenance

29,105

29,825

32,073

Amortization of purchased product rights

384

568

1,136

Total cost of revenues

33,728

35,824

38,580

Gross profit

58,329

53,170

65,267

Operating expenses

Sales and marketing

26,322

34,985

44,128

Research and development

17,266

22,566

24,151

General and administrative

12,569

13,143

14,840

Impairment of purchased product rights

1,224

Restructuring charges and adjustments

13,873

(1,169)

Total operating expenses

56,157

85,791

81,950

Income (loss) from operations

2,172

(32,621)

(16,683)

Other income (expense)

Interest income

1,281

1,680

3,346

Foreign exchange gain (loss)

429

(431)

(72)

Loss from equity investments

(1,201)

(693)

(692)

Realized loss on investments

(310)

Write-down of long-term strategic investments

(2,780)

(1,238)

Total other income (expense)

509

(2,224)

1,034

Income (loss) before income taxes and minority interest

2,681

(34,845)

(15,649)

Noncontrolling interest in subsidiary

4

Income (loss) before income taxes

2,685

(34,845)

(15,649)

Provision for income taxes

1,047

418

1,268

Net income (loss)

$ 1,638

$(35,263)

$(16,917)

Calculate the sustainable earnings of Entrust, Inc., for each of the three years. Remember to use negative signs with answers, when appropriate.

Year 3

Year 2

Year 1

Permanent earnings

$

$

$

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