Donna Jamison was recently hired as a financial analyst by Computron Industries, 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.

Balance Sheets20162015

Assets

Cash$52,000$57,600

Accounts receivable402,000351,200

Inventories836,000715,200

Total current assets$1,290,000$1,124,000

Gross fixed assets527,000491,000

Less accumulated depreciation166,200146,200

Net fixed assets$360,800$344,800

Total assets$1,650,800$1,468,800

Liabilities and Equity

Accounts payable$175,200$145,600

Notes payable225,000200,000

Accruals140,000136,000

Total current liabilities$540,200$481,600

Long-term debt424,612323,432

Common stock (100,000 shares)460,000460,000

Retained earnings225,988203,768

Total equity$685,988$663,768

Total liabilities and equity$1,650,800$1,468,800

(continued)

Income Statements20162015

Sales$3,850,000$3,432,000

Cost of goods sold(3,250,000)(2,864,000)

Other expenses(430,300)(340,000)

Depreciation(20,000)(18,900)

Total operating costs$3,700,300$3,222,900

EBIT$149,700$209,100

Interest expense(76,000)(62,500)

EBT$73,700$146,600

Taxes (40%)(29,480)(58,640)

Net income$44,220$87,960

EPS$0.442$0.880

Statement of Cash Flows (2016)

Operating Activities

Net income$44,220

Other additions (sources o f cash)

Depreciation20,000

Increase in accounts payable29,600

Increase in accruals4,000

Subtractions (uses of cash)

Increases in accounts receivable(50,800)

Increase in inventories(120,800)

Net cash flow from operations$( 73,780)

Long-Term Investing Activities

Investment in fixed assets$( 36,000)

Financing Activities

Increase in notes payable$25,000

Increase in long-term debt101,180

Payment of cash dividends( 22,000)

Net cash flow from financing$104,180

Net reduction in cash account$(5,600)

Cash at beginning of year57,600

Cash at end of year$ 52,000

(continued)

Other Data20162015

December 31 stock price$6.00$8.50

Number of shares100,000100,000

Dividends per share$ 0.22$0.22

Lease payments$40,000$40,000

Industry average data for 2016:

RatioIndustry Average

Current2.7x

Quick1.0x

Inventory turnover6.0x

Days sales outstanding (DSO)32.0 days

Fixed assets turnover10.7x

Total assets turnover2.6x

Debt ratio50.0%

TIE2.5x

Fixed charge coverage2.1x

Net profit margin3.5%

ROA9.1 %

ROE18.2%

Price/earnings14.2x

Market/book1.4x

Assume that you are Donna Jamison's assistant and that she has asked you to help her prepare one 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 is Computron's inventory turnover, day's 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 ratiosthat is, its net profit margin, return on assets (ROA), and return on equity (ROE).

g.Calculate Computron's market value ratiosthat 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 2016 balance sheet to show, in general terms, how an improvement in one of the ratiossay, the DSOwould affect the stock price. For example, if the company could improve its collection procedures and thereby lower the DSO from 38.1 days to 27.8 days, how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price?

Accounts receivable$ 402Debt$ 965

Other current assets888

Net fixed assets361Equity686

Total assets$1,651Total liabilities and equity$1,651