The first part of the case, presented in Chapter 6, discussed the situation of Computron Industries after an expansion program A large loss occurred in 2018 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 Computrons chairman, who had the task of getting the company back into a sound financial position Cochran must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions to take Your assignment is to help her answer the following questions, using the recent and projected financial information shown next Provide clear explanations, not yes or no answers Balance Sheets 2017 2018 2019E Assets 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 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 Note E denotes estimated the 2019 data are forecasts Income Statements 2017 2018 2019E 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 Depreciation and amortization 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 Pre tax earnings $ 146,600 ($ 158,560) $ 422,640 Taxes (40 ) 58,640 (63,424) 169,056 Net income $ 87,960 ($ 95,136) $ 253,584 Note E denotes estimated the 2019 data are forecasts Other Data 2017 2018 2019E 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 Note E denotes estimated the 2019 data are forecasts Ratio Analysis 2017 2018 2019E Industry Average Current 2 3 1 5 2 7 Quick 0 8 0 5 1 0 Inventory turnover 4 0 4 0 6 1 Days sales outstanding 37 3 39 6 32 0 Fixed assets turnover 10 0 6 2 7 0 Total assets turnover 2 3 2 0 2 5 Debt ratio 35 6 59 6 32 0 Liabilities to assets ratio 54 8 80 7 50 0 TIE 3 3 0 1 6 2 EBITDA coverage 2 6 0 8 8 0 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 7 6 3 16 2 Price cash flow 8 0 27 5 7 6 Market book 1 3 1 1 2 9 Note E denotes estimated Why are ratios useful What three groups use ratio analysis and for what reasons Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data What can you say about the companys liquidity position in 2017, 2018, and as projected for 2019 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 Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover How does Computrons utilization of assets stack up against that of other firms in its industry Calculate the 2019 debt ratio, liabilities to assets ratio, times interest earned ratio, and EBITDA coverage ratios How does Computron compare with the industry with respect to financial leverage What can you conclude from these ratios Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE) What can you say about these ratios Calculate the 2019 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 Perform a common size analysis and percentage change analysis What do these analyses tell you about Computron Use the extended DuPont equation to provide a summary and overview of Computrons financial condition as projected for 2019 What are the firms major strengths and weaknesses What are some potential problems and limitations of financial ratio analysis What are some qualitative factors that analysts should consider when evaluating a companys likely future financial performance

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The first part of the case, presented in Chapter 6, discussed the situation of Computron Industries after an expansion program. A large loss occurred in

The first part of the case, presented in Chapter 6, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2018 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 Computrons chairman, who had the task of getting the company back into a sound financial position. Cochran must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions to take. Your assignment is to help her answer the following questions, using the recent and projected financial information shown next. Provide clear explanations, not yes or no answers.

Balance Sheets

		2017	2018	2019E
Assets
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
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

Note: E denotes estimated; the 2019 data are forecasts.

Income Statements

		2017	2018	2019E
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
Depreciation and amortization		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
	Pre-tax earnings	$ 146,600	($ 158,560)	$ 422,640
Taxes (40%)		58,640	(63,424)	169,056
Net income		$ 87,960	($ 95,136)	$ 253,584

Note: E denotes estimated; the 2019 data are forecasts.

Other Data

	2017	2018	2019E
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

Note: E denotes estimated; the 2019 data are forecasts.

Ratio Analysis

	2017	2018	Industry Average
Current	2.3	1.5	2.7
Quick	0.8	0.5	1.0
Inventory turnover	4.0	4.0	6.1
Days sales outstanding	37.3	39.6	32.0
Fixed assets turnover	10.0	6.2	7.0
Total assets turnover	2.3	2.0	2.5
Debt ratio	35.6%	59.6%	32.0%
Liabilities-to-assets ratio	54.8%	80.7%	50.0%
TIE	3.3	0.1	6.2
EBITDA coverage	2.6	0.8	8.0
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)	9.7	6.3	16.2
Price/cash flow	8.0	27.5	7.6
Market/book	1.3	1.1	2.9

Note: E denotes estimated.

Why are ratios useful? What three groups use ratio analysis and for what reasons?
Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companys liquidity position in 2017, 2018, and as projected for 2019? 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?
Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computrons utilization of assets stack up against that of other firms in its industry?
Calculate the 2019 debt ratio, liabilities-to-assets ratio, times-interest-earned ratio, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?
Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
Calculate the 2019 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?
Perform a common size analysis and percentage change analysis. What do these analyses tell you about Computron?
Use the extended DuPont equation to provide a summary and overview of Computrons financial condition as projected for 2019. What are the firms major strengths and weaknesses?
What are some potential problems and limitations of financial ratio analysis?
What are some qualitative factors that analysts should consider when evaluating a companys likely future financial performance?