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    Computron Company Financial Analysis

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    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?

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