Homework #1 - Ratio Analysis 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 past two years. To begin, she gathered the following financial statements and other data BALANCE SHEETS 2018 2017 ASSETS CASH ACCOUNTS RECEIVABLE INVENTORIES TOTAL CURRENT ASSETS GROSS FIXED ASSETS LESS: ACCUMULATED DEPRECIATION NET FIXED ASSETS $ 52,000 402,000 836,000 $1.290,000 527,000 166,200) $_360,800 $1,650.800 $ 57,600 351,200 715.200 $1,124.000 491,000 146,200) $ 344.800 $1,468.800 TOTAL ASSETS LIABILITIES AND EQUITY ACCOUNTS PAYABLE NOTES PAYABLE ACCRUALS TOTAL CURRENT LIABILITIES LONG-TERM DEBT $ 175,200 225.000 140,000 $ 540,200 424,612 460,000 225,988 $ 685.988 $1,650.800 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203.768 $ 663.768 $1.468.800 COMMON STOCK RETAINED EARNINGS TOTAL EQUITY TOTAL LIABILITIES AND EQUITY INCOME STATEMENTS SALES 2018 $3,850,000 2017 $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) c 58.640) NET INCOME $ 44,220 $ 87.960 EPS $0.442 $0.880 OTHER DATA 2018 2017 DECEMBER 31 STOCK PRICE $6.00 $ 8.50 NUMBER OF SHARES 100,000 100,000 DIVIDENDS PER SHARE $ 0.22 $ 0.22 LEASE PAYMENTS $40,000 $40,000 STATEMENT OF CASH FLOWS (2018) OPERATING ACTIVITIES: NET INCOME $ 44,220 OTHER ADDITIONS (SOURCES OF CASH): DEPRECIATION INCREASE IN ACCOUNTS PAYABLE INCREASE IN ACCRUALS SUBTRACTIONS FROM NET INCOME: INCREASE IN ACCOUNTS RECEIVABLE 20,000 29,600 4,000 INCREASE IN INVENTORY ( 50,800) (120,800) ($ 73,780) NET CASH FLOW FROM OPERATIONS LONG-TERM INVESTING ACTIVITIES INVESTMENT IN FIXED ASSETS ( 36,000) FINANCING ACTIVITIES: INCREASE IN NOTES PAYABLE INCREASE IN LONG-TERM DEBT PAYMENT OF CASH DIVIDENDS $ 25,000 101,180 ( 22.000) $104.180 NET CASH FLOW FROM FINANCING NET CHANGE IN CASH ACCOUNT ($ 5,600) CASH AT BEGINNING OF YEAR CASH AT END OF YEAR 57,600 $52.000 INDUSTRY AVERAGE DATA FOR 2018: RATIO CURRENT INDUSTRY AVERAGE 2.7x 1.0X 5.8x 32.0 DAYS QUICK INVENTORY TURNOVER DAYS SALES OUTSTANDING (DSO) FIXED ASSETS TURNOVER TOTAL ASSETS TURNOVER DEBT RATIO TIE 10.7% 2.6x 50.0% 2.5x FIXED CHARGE COVERAGE 2.1x PROFIT MARGIN ROA ROE 3.5% 9.1% 18.2% 14.2x PRICE/EARNINGS MARKET/BOOK 1.4x 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. E. 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? 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? CALCULATE AND DISCUSS THE FIRM'S PROFITABILITY RATIOSTHAT IS, ITS PROFIT MARGIN, RETURN ON ASSETS (ROA), AND RETURN ON EQUITY (ROE). 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? F. G. H. I PROVIDE A SUMMARY AND OVERVIEW OF COMPUTRON'S FINANCIAL CONDITION. WHAT ARE THE FIRM'S MAJOR STRENGTHS AND WEAKNESSES? USE THE FOLLOWING SIMPLIFIED 2018 BALANCE SHEET TO SHOW, IN GENERAL TERMS, HOW AN IMPROVEMENT IN ONE OF THE RATIOSSAY, THE DSO-WOULD AFFECT THE STOCK PRICE. FOR EXAMPLE, IF THE COMPANY COULD IMPROVE ITS COLLECTION PROCEDURES AND THEREBY LOWER THE DSO FROM 37.6 DAYS TO 27.6 DAYS, HOW WOULD THAT CHANGE "RIPPLE THROUGH THE FINANCIAL STATEMENTS (SHOWN IN THOUSANDS BELOW) AND INFLUENCE THE STOCK PRICE? ACCOUNTS RECEIVABLE $ 402 DEBT $ 965 OTHER CURRENT ASSETS 888 NET FIXED ASSETS 361 EQUITY 686 TOTAL LIABILITIES J. TOTAL ASSETS S1,651 AND EQUITY $1,651 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