The first part of the case, presented in Chapter 2, discussed the situation of Compton Industries after an expansion program. A large loss occurred in 2013, 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 Gary Meissen, Compton's chairman, who had the task of getting the company back into a sound financial position. Compton's

2012 and 2013 balance sheets and income statements, together with projections for 2014, are shown in the following tables. The tables also show the 2012 and 2013 financial ratios, along with industry average data. The 2014 projected financial statement data represent Cochran's and Meissen's best guess for 2014 results, assuming that some new financing is arranged to get the company "over the hump."

Balance Sheets

Note. "E" donations "estimated" ; the 2014 data are forecasts.
Income Statements

Note. "E" denotes "estimated"; the 2014 data are forecasts.

Ratio Analysis

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. 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 2014 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 2012, 2013, and as projected for 2014? 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 2014 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 2014 debt ratio, liabilities-to-assets ratio, 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 2014 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 2014 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 2014. 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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2012 2013 2014E Assets Cash Short-term investments Accounts receivable S 9,000 48,600 351 200 $ 7,282 20,000 632,160 S 14,000 71,632 878,000 1716480 52,680,112 1220,000 Total current assets Gross fixed assets S 1,124,000 491,000 $1,946,802 1202950 Less: Accumulated depreciation 146200263160383160 S 344800 Net fixed assets Total assets Liabilities and Equity Accounts payable Notes payable Accruals S 939790 886,592 S 836 840 1,468,800 S 145,600 200,000 S 324,000 S 359,800 720,000 300,000 36,000-28-60-38 0,000 Total current liabilities Long-term debt Common stock (100,000 S 481,600 323,432 460,000 $1,328,960 1,000,000 460,000 $1,039800 500,000 1,680936 shares) Retained 203,768 S 663,768 S 1468,800 97,632 S 557,632 $2,886,592 296,216 $1,977,152 53,516,952 carnings Total equity Total liabilities and equity 2012 2013 2014E Sales S 3,432,000 Cost of goods sold except depr.2,864,000 18,900 340,000 $5 834,400 4,980,000 116,960 720,000 S 3 222.9005816960 S 17440 $7,035,600 5,800,000 120,000 61251) S6532960 S 502,640 Depreciation and amortization Other expenses Total operating costs EBIT Interest expense S 209,100 EBT Taxes (40%) Net income S 146,600 ー58640 60 S 158,560) ー(63424) 422,640 -165,056 Other Data Stock price Shares outstanding 8.50 100,000 S 0880 0.220 40% S6.638 S 40,000 6.00 100,000 (S 0.951) 0.110 S 12.17 250,000 1.014 0 DPS Tax rate Book value per share Lease payments S 5.576 S 40,000 S 7.909 S 40,000 Fixed assets turnover Total assets turnover margin Basic earning power Price/Earnings (P/E) Price/Cash flow