The first part of the case, presented in Chapter 2, discussed the situation that Computron Industries was in after an expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2012, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.
Donna Jamison was brought in as assistant to Fred Campo, Computron's chairman, who had the task of getting the company back into a sound financial position. Computron's 2011 and 2012 balance sheets and income statements, together with projections for 2013, are shown in the following tables. Also, the tables show the 2011 and 2012 financial ratios, along with industry average data. The 2013 projected financial statement data represent Jamison's and Campo's best guess for 2013 results, assuming that some new financing is arranged to get the company over any difficulties.
Jamison examined monthly data for 2012 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data looked somewhat worse than final monthly data. Also, it appeared to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. For these reasons, Jamison and Campo see hope for the company-provided it can survive in the short run.
Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.
a. Why are ratios useful? What are the five major categories of ratios?
b. Calculate the 2013 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2011, 2012, and as projected for 2013? 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 shareholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?
c. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against other firms in its industry?
d. Calculate the 2013 debt, times-interest-earned, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?
e. Calculate the 2013 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
f. Calculate the 2013 price/earnings ratio, price/cash flow ratios, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
g. Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?
h. Use the extended DuPont equation to provide a summary and overview of Computron's financial condition as projected for 2013. What are the firm's major strengths and weaknesses?
i. What are some potential problems and limitations of financial ratio analysis?