a. Why are ratios useful? What are the five major categories of ratios?

b. Calculate the 2016 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2014,2015, and as projected for 2016? We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to shareholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2016 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against that of other firms in its industry?

d. Calculate the 2016 debt, times-interest-earned, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?

e. Calculate the 2016 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

f. Calculate the 2016 price/ earnings ratio, price/ cash flow ratio, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?

h. Use the extended DuPont equation to provide a summary and overview ofComputron's financial condition as projected for 2016. What are the firm's major strengths and weaknesses? 

i. What are some potential problems and limitations of financial ratio analysis? 

The first part of the case, presented in Chapter 2, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2015, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Jenny Cochran was brought in as assistant to Gary Meissner, Computron's chair, who had the task of getting the company back into a sound financial position. Computron's 2014 and 2015 balance sheets and income statements, together with projections for 2016, are shown in the following tables. The tables also show the 2014 and 2015 financial ratios, along with industry average data. The 2016 projected financial statement data represent Cochran's and Meissner's best guess for 2016 results, assuming that some new financing is arranged to get the company "over the hump." 

Cochrane must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

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Balance Sheets 2014 2015 2016E Assets $ 14,000 Cash 9,000 $ 7,282 Short-term investments 48,600 71,632 20,000 351,200 Accounts receivable 632,160 878,000 Inventories 715,200 1,287,360 1,716,480 Total current assets 1,124,000 1,946,802 2,680,112 Gross fixed assets 1,220,000 491,000 1,202,950 Less: accumulated depreciation 146,200 263,160 383,160 Net fixed assets 836,840 344,800 939,790 Total assets $1,468,800 $2,886,592 $3,516,952 Liabilities and Equity Accounts payable Notes payable $ 145,600 $ 324,000 $ 359,800 720,000 200,000 300,000 Accruals 136,000 284,960 380,000 Total current liabilities 481,600 1,328,960 1,039,800 Long-term debt Common stock (100,000 shares) 323,432 1,000,000 500,000 460,000 460,000 1,680,936 Retained earnings 203,768 296,216 97,632 Total equity 663,768 557,632 1,977,152 Total liabilities and equity $1,468,800 $2,886,592 $3,516,952 Note: "E" indicates estimated. The 2016 data are forecasts. Income Statements 2015 2016E 2014 Sales $3,432,000 $5,834,400 $7,035,600 Cost of goods sold except depr. 2,864,000 4,980,000 5,800,000 Other expenses 340,000 720,000 612,960 Depreciation 18,900 116,960 120,000 Total operating costs 3,222,900 5,816,960 6,532,960 209,100 EBIT 17,440 502,640 Interest expense 62,500 176,000 80,000 (158,560) EBT 422,640 146,600 Taxes (40%) (63,424) 58,640 169,056 $ 87,960 $ (95,136) Net income (loss) $ 253,584 Other Data Stock price Shares outstanding 8.50 $ 6.00 12.17 100,000 100,000 250,000 EPS 0.88 (0.95) $ 1.01 DPS 0.22 0.11 0.22 Tax rate 40% 40% 40% Book value per share Lease payments 6.638 5.576 7.909 $ 40,000 $ 40,000 $ 40,000 Note: "E" indicates estimated. The 2016 data are forecasts. Industry Average Ratio Analysis 2014 2015 2016E Current 2.3X 1.5X 2.7X Quick 0.8X 0.5X 1.0X Inventory turnover 4.0x 4.0X 6.1x Days sales outstanding 37.4 days 39.6 days 32.0 days Fixed assets turnover 10.0X 6.2X 7.0X Total assets turnover 2.3X 2.0X 2.5X Debt ratio 35.6% 59.6% 32.0% TIE 3.3X 0.1x 6.2X EBITDA coverage 2.6X 0.8X 8.0X Profit margin 2.6% -1.6% 3.6% Basic earning power 14.2% 0.6% 17.8% ROA 6.0% -3.3% 9.0% ROE 13.3% -17.1% 17.9% Price/earnings (P/E) 9.7X N.M. 16.2X Price/cash flow 8.0X 27.5X 7.6X Market/book 1.3X 1.1X 2.9X Note: "E" indicates estimated. The 2016 data are forecasts. "N.M." indicates not meaningful with losses. %24 %24 %24