discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2013, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firms survival.

Jenny Cochran was brought in as assistant to Gary Meissner, Computrons chairman, who had the task of getting the company back into a sound financial position. Computrons 2012 and 2013 balance sheets and income statements, together with projections for 2014, are shown in the following tables. The tables also show the 2012 and 2013 financial ratios, along with industry average data. The 2014 projected financial statement data represent Cochrans and Meissners best guess for 2014 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.

Balance Sheets
Assets	2012		2013		2014e
Cash	$ 9,000		$ 7,282		$ 14,000
Short-Term Investments.	48,600		20,000		71,632
Accounts Receivable	351,200		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	491,000		1,202,950		1,220,000
Less: Accumulated Depreciation	146,200		263,160		383,160
Net Fixed Assets	$ 344,800		$ 939,790		$ 836,840
Total Assets	$ 1,468,800		$ 2,886,592		$ 3,516,952
Liabilities And Equity	2011		2012		2013e
Accounts Payable	$ 145,600		$ 324,000		$ 359,800
Notes Payable	200,000		720,000		300,000
Accruals	136,000		284,960		380,000
Total Current Liabilities	$ 481,600		$ 1,328,960		$ 1,039,800
Long-Term Debt	323,432		1,000,000		500,000
Common Stock (100,000 Shares)	460,000		460,000		1,680,936
Retained Earnings	203,768		97,632		296,216
Total Equity	$ 663,768		$ 557,632		$ 1,977,152
Total Liabilities And Equity	$ 1,468,800		$ 2,886,592		$ 3,516,952

Income Statements
	2012		2013		2014e
Sales	$ 3,432,000		$ 5,834,400		$ 7,035,600
COGS except depr.	2,864,000		4,980,000		5,800,000
Depreciation	18,900		116,960		120,000
Other Expenses	340,000		720,000		612,960
Total Operating Costs	$ 3,222,900		$ 5,816,960		$ 6,532,960
EBIT	$ 209,100		$ 17,440		$ 502,640
Interest Expense	62,500		176,000		80,000
EBT	$ 146,600		$ (158,560)		$ 422,640
Taxes (40%)	58,640		(63,424)		169,056
Net Income	$ 87,960		$ (95,136)		$ 253,584
Other Data	2012		2013		2014e
Stock Price	$ 8.50		$ 6.00		$ 12.17
Shares Outstanding	100,000		100,000		250,000
EPS	$ 0.880		$ (0.951)		$ 1.014
DPS	$ 0.220		$ 0.110		$ 0.220
Tax Rate	40%		40%		40%
Book Value Per Share	$ 6.638		$ 5.576		$ 7.909
Lease Payments	$ 40,000		$ 40,000		$ 40,000

Ratio Analysis	2012		2013		2014e	Industry Average
Current						2.7
Quick						1.0
Inventory Turnover						6.1
Days Sales Outstanding						32.0
Fixed Assets Turnover						7.0
Total Assets Turnover						2.5
Debt Ratio						32.0%
Liabilities/Assets Ratio						50.0%
TIE						6.2
EBITDA Coverage						8.0
Profit Margin						3.6%
Basic Earning Power						17.8%
ROA						9.0%
ROE						17.9%
Price/Earnings (P/E)						16.2
Price/Cash Flow						7.6
Market/Book						2.9

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

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b. Calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companys liquidity position in 2012, 2013, and as projected for 2014? 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 stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

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c. Calculate the 2014 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computrons utilization of assets stack up against other firms in its industry?

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d. Calculate the 2014 debt ratio, liabilities-to-assets ratio, 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?

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e. Calculate the 2014 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

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f. Calculate the 2014 price/earnings ratio, price/cash flow ratios, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?

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

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h. Use the extended Du Pont equation to provide a summary and overview of Computrons financial condition as projected for 2014. What are the firms major strengths and weaknesses?

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

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j. What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?

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