The first part of the case, presented in Chapter 2, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2016, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Jenny Cochran was brought in as assistant to Computron's 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

Income Statements

Other Data

Ratio Analysis

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?
b. Calculate the 2017 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 2015, 2016, and as projected for 2017? 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 2017 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against that of other firms in its industry?
d. Calculate the 2017 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?
e. Calculate the 2017 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 2017 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?
g. Perform a common size analysis and percentage 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 2017. What are the firm's major strengths and weaknesses?
i. What are some potential problems and limitations of financial ratio analysis?
j. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance?

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2015 2016 2017E $ 9,000 48,600 351,200 $ 7,282 20,000 632,160 1,287,360 $1,946,802 1,202,950 263,160 $ 939,790 $2,886,592 $ 14,000 71,632 878,000 1,716,480 $2,680,112 1,220,000 Short-term investments Accounts receivable Inventories 3 Total current assets Gross fixed assets Less: Accumulated depreciation $1,124,000 491,000 146,200 $344,800 $1,468,800 Net fixed assets Total assets $ 836,840 $3,516,952 Liabilities and Equity Accounts payable Notes payable 2015 2016 2017E $ 324,000 720,000 284,960 $1,328,960 1,000,000 460,000 97,632 S 663.768 557632 $145,600 200,000 136,000 $481,600 323,432 460,000 203,768 359,800 300,000 380,000 $1,039,800 500,000 1,680,936 296,216 $1,977,152 $3,516,952 Total current liabilities Long-term debt Common stock (100,000 shares) Retained earnings Total equity Total liabilities and equity $1,468,800 $2,886,592 2015 2016 2017E Sales Cost of goods sold except depr Depreciation and amortization Other expenses Total operating costs EBIT Interest expense Pre-tax earnings Taxes (40%) Net income $3,432,000 2,864,000 18,900 340,000 $3,222,900 $209,100 62,500 146,600 $5,834,400 4,980,000 116,960 720,000 $5,816,960 S 17,440 176,000 $7,035,600 5,800,000 120,000 612,960 $6,532,960 $502,640 80,000 (S158,560) 422,640 58.640(63.424169.056 253,584 $ 95,136) 2 2017E Stock price Shares outstanding EPS DPS Tax rate Book value per share 2015 $8.50 100,000 $0.880 $0.220 2016 $6.00 100,000 $0.951 $0.110 $12.17 250,000 $1.014 $0.220 40% 40% 40% $6.638 $40,000 $5.576 $40,000 $7.909 $40,000 payments 2017E Average Current nventory turnover Days sales outstanding Fixed assets turnover Total assets turnover 9 2 ra Liabilities-to-assets ratio 54.8% EBITDA coverage margin Basic earning power Price/Earnings (P/E) Price/Cash flow Market/Book 2 1