Computron Company Financial Analysis

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 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the tables. The 2009 and 2010 financial ratios are also shown along with industry average data. The 2011 projected financial statement data represent Jamison's and Campo's best guess for 2011 results.

Balance Sheets 2009, 2010, 2011
Assets
Cash $9,000, $7,282, $14,000
Short-term investments $48,600, $20,000, $71,632
Accounts receivable $351,200, $632,160, $878,000
Inventories $715,200, $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, $939,790, $836,840
Total assets $1,468,800, $2,886,592, $3,516,952

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) 460,000, 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

Income statements
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 $18,900, 116,960, 120,000
Total operating costs $3,222,900, 5,816,960, 6,532,960
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
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 payments $40,000, 40,000, 40,000

Ratio Analysis 2009 2010 2011 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

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?
b. Calculate the 2011 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 2009, 2010, and as projected for 2011? 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 2011 inventory turnover, days sales outstanding, 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 2011 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 2011 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 2011 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 Du Pont equation to provide a summary and overview of Computron's financial condition as projected for 2011. What are the firms's major strengths and weaknesses?