Donna Jamison was recently hired as a financial analyst by Computron Indus tries a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data:

Statement of Cash Flows (2015)

Assume that you are Donna Jamison’s assistant and that she has asked you to help her prepare a report that evaluates the company’s financial condition. Answer the following questions:

a. What can you conclude about the company’s financial condition from its statement of cash flows?

b. What is the purpose of financial ratio analysis, and what are the five major categories of ratios?

c. What are Computron’s current and quick ratios? What do they tell you about the company’s liquidity position?

d. What are Computron’s inventory turnover days sales outstanding, fixed assets turnover, and total assets turnover ratios? How does the firm’s utilization of assets stack up against that of the industry?

e. What are the firm’s debt, times interest earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?

f. Calculate and discuss the firm’s profitability ratios—that is, its net profit margin, return on assets (ROA), and return on equity (ROE).

g. Calculate Computron’s market value ratios—that is, its price/earnings ratio and its market/book ratio. What do these ratios tell you about investors’ opinions of the company?

h. Use the DuPont equation to provide a summary and overview of Computron’s financial condition. What are the firm’s major strengths and weaknesses?

i. Use the following simplified 2015 balance sheet to show, in general terms, how an improvement in one of the ratios—say, the DSO—would affect the stock price. For example, if the company could improve its collection procedures and there by lower the DSO from 38.1 days to 27.8 days, how would that change “ripple through” the following financial statements ($thousands) and influence the stock price?

j. Although financial statement analysis can provide useful information about a company’s operations and its financial condition, this type of analysis does have some potential problems and limitations, and it must be used with care and judgment. What are some problems and limitations?

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1 receivable Total current assets Less: Accumulated depreciation assets Accounts payable $ 540,200 Total current liabilities Long-term debt Common stock (100,000 shares) Total equity Total liahilities and equity 0 $1468,800 Income Statements 2 Cost of goods sold Total operating costs Taxes (40%) 4 Operaling Activities Net income Additions (sources of cash) 44,220 20,000 Depreciation Increase in accounts payable Increase in accruals 29,600 Subtractions fuses of cash) Increases in accounts receivable 50,800) 120,800) Increase in nventories Net cash flow from operations $(73,780) Long-Term Investing and Financing Activities Investment in fixed assets Increase in notes payable Increase in long-term debt Payment of cash dividends $(36,000) S 25,000 101,180 22,000) Net cash flow from investing and financing Net reduction in cash account Cash at beginning of year Cash at end of year S68,180 57,600 Other Data 2015 2014 December 31 stock price Number of shares Dividends per share Lease payments $6.00 100,000 $ 0.22 40,000 $ 8.50 100,000 $0.22 S 40,000 Industry Avrage Data for 2015 Industry Average 2.7x 1.0x 6.0x Inventory turnover Days sales outstanding (DSO) Fixed assets turnover Total assets turnover Debt ratio 32.0 days 10.7x 2.6x 50.0% 2.5x 2.1x 3.5% 9.1% 18.2% 14.2x 1.4x Fixed charge coverage Net profit margin ROA ROE Pricelearnings $ 402 Debt $965 ccounts receivable Other current assets Net fixed assets Total assets 361 Equity $1,651 686 S1,651 Total liabilities and equity