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

The first part of the case, presented in Chapter 6, dis- cussed the situation of Computron Industries after an expansion program. A large loss occurred in 2015, rather than the expected profit. As a result, its man- agers, 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 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 finan- cial statement data represent Cochrans and Meiss- ners best guess for 2016 results, assuming that some new financing is arranged to get the company over the hump.

Balance Sheet

2014

2015

2016

Assets

Cash

$9,000

$7,282

$14,000

Short-term investments

48,000

20,000

71,632

Accounts receivable

351,200

632,160

878,000

Inventories

751,200

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

$39,790

$36,840

Total assets

$1,468,800

$2,886,592

$,516,952

2011

2012

2013

Liabilities & 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)

460,800

460,000

1,680,936

Retained earnings

203,768

97,632

296,216

Total equity

$663,768

$557,632

$1,977,152

Total liabilities & Equity

$1,468,800

$2,886,592

$3,516,952

Note: E denotes, estimated; the 2013 data for forecasts.

Income Statement

2014

2015

2016

Sales

$3,432,000

$5,834,400

$7,035,600

Cost of goods sold

2,864,000

4,980,000

5,800,000

Other expenses

340,000

720,000

612,960

Depreciation & Amortization

18,900

116,960

120,000

Total operating Cost

$3,222,900

$5,816,960

$6,532,962

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

Stock price

$8.50

$6.00

$12.17

Shares outstanding

100,000

100,000

250,000

2011

2012

2013E

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 payment

$40,000

$40,000

$40,000

Note: E denotes estimated; the 2013 data are forecasts.

Ratio Analysis

2014

2015

2016E

Industry Average

Current

2.3

1.5

------------------

2.7

Quick

0.8

0.5

------------------

1.0

Inventory turnover

4.8

4.5

------------------

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

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

Cochran must prepare an analysis of where the company is now, what it must do to regain its finan- cial health, and what actions to take. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

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

b. Calculate the 2016 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companys 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 stockholders 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 Computrons utilization of assets stack up against that of other firms in its industry?

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

e. Calculate the 2016 profit margin, basic earning h. 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/ i. cash flow ratio, and market/book ratio. Do these ratios indicate that investors are expected to j. have a high or low opinion of the company?

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

h. Use the extended DuPont equation to provide a summary and overview of Computrons finan- cial condition as projected for 2016. What are the firms major strengths and weaknesses?

i. What are some potential problems and limita- tions of financial ratio analysis?

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

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