Question
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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