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Chapter 3 Mini Case

Analysis of Finacial Statements
The first part of the case, presented in Chapter 2, discussed Computron Industries situation after an expansion program. A large
loss occurred in 2010, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the
firms survival.
Donna Jamison was brought in as an 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 following tables. Also, the tables show the 2009 and 2010 financial ratios along with industry average
data. The 2011 projected financial statement data represent Jamison's and Campo's best guess for 2011 results, assuming that some
new financing is arranged to get the company "over the hump."
Input Data:
2009
$8.50
100,000
40%
$40,000

2010
$6.00
100,000
40%
$40,000

2011
$12.17
250,000
40%
$40,000

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Gross Fixed Assets
Less Accumulated Dep.
Net Fixed Assets
Total Assets

2009
$9,000
$48,600
$351,200
$715,200
$1,124,000
$491,000
$146,200
$344,800
$1,468,800

2010
$7,282
$20,000
$632,160
$1,287,360
$1,946,802
$1,202,950
$263,160
$939,790
$2,886,592

2011
$14,000
$71,632
$878,000
$1,716,480
$2,680,112
$1,220,000
$383,160
$836,840
$3,516,952

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total liabilities
Common stock (100,000 shares)
Retained earnings
Total common equity
Total liabilities and equity

$145,600
$200,000
$136,000
$481,600
$323,432
$805,032
$460,000
$203,768
$663,768
$1,468,800

$324,000
$720,000
$284,960
$1,328,960
$1,000,000
$2,328,960
$460,000
$97,632
$557,632
$2,886,592

$359,800
$300,000
$380,000
$1,039,800
$500,000
$1,539,800
$1,680,936
$296,216
$1,977,152
$3,516,952

2009
$3,432,000
$2,864,000
$340,000
$18,900
$3,222,900
$209,100
$62,500
$146,600
$58,640
$87,960
$0.880
$0.220
$6.638

2010
$5,834,400
$4,980,000
$720,000
$116,960
$5,816,960
$17,440
$176,000
($158,560)
($63,424)
($95,136)
($0.951)
$0.110
$5.576

2011
$7,035,600
$5,800,000
$612,960
$120,000
$6,532,960
$502,640
$80,000
$422,640
$169,056
$253,584
$1.014
$0.220
$7.909

Year-end common stock price

Year-end shares outstanding
Tax rate
Lease payments
Balance Sheets

Income Statements

Net sales
Costs of Goods Sold
Other Expenses
Depreciation
Total Operating Cost
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends
EPS
DPS
Book Value Per Share

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?
Answer: See Chapter 03 Mini Case PwrPt Show
b. (1.) Calculate the current and quick ratios based on the projected balance sheet and income statement data.
Calculated Data: Ratios
Liquidity ratios
Current Ratio
Quick Ratio

2009

2010

2011

Industry
Average

2.33
0.85

1.46
0.50

2.58
0.93

2.70
1.00

(2.) What can you say about the company's liquidity position? 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? Answer: Chapter 03 Mini Case PwrPt Show

c. Calculate the inventory turnover, days sales outstanding (DSO), fixed assets turnover, operating capital requirement, and total
assets turnover. How does Computron's utilization of assets stack up against other firms in its industry?

Asset Management ratios

Inventory Turnover
Days Sales Outstanding
Fixed Asset Turnover
Total Asset Turnover

2009
4.80
37.4
9.95
2.34

2010
4.53
39.5
6.21
2.02

2011
4.10
45.5
8.41
2.00

Industry
Average
6.10
32.00
7.00
2.50

d. Calculate the 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?
Industry
Debt Management ratios
2009
2010
2011
Average
Debt Ratio
54.8%
80.7%
43.8%
50.0%
Times Interest Earned
3.35
0.10
6.28
6.20
EBITDA Coverage Ratio
2.61
0.81
5.52
8.00
e. Calculate the profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say
about these ratios?
Industry
Profitability ratios
2009
2010
2011
Average
Net Profit Margin
2.6%
-1.6%
3.6%
3.6%
Operating Margin
6.1%
0.3%
7.1%
7.1%
Gross Profit Margin
16.6%
14.6%
17.6%
15.5%
Basic Earning Power
14.2%
0.6%
14.3%
17.8%
Return on Assets
6.0%
-3.3%
7.2%
9.0%
Return on Equity
13.3%
-17.1%
12.8%
18.0%
f. Calculate the 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?
Industry
Market Value ratios
2009
2010
2011
Average
Price-to Earnings Ratio
9.66
-6.31
12.00
14.20
Price-to-Cash Flow Ratio
7.95
27.49
8.14
7.60
Market-to-Book Ratio
1.28
1.08
1.54
2.90
Book Value Per Share
6.64
5.58
7.91
na
g. Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?
See the worksheet with the TAB "Common Size and % Change"
h. Use the extended Du Pont equation to provide a summary and overview of Computron's projected financial condition. What are
the firm's major strengths and weaknesses?
Du Pont Analysis
Computron
2009
Computron
2010
Computron
2011
Industry Average

ROE
13.3%
-17.1%
12.8%
18.00%

P.M.
2.6%
-1.6%
3.6%
3.6%

T.A.T.O. Equity Multiplier

2.3
2.21
2.0
5.18
2.0
1.78
2.5
2.00

i. What are some potential problems and limitations of financial ratio analysis? Answer: See Chapter 03 Mini Case PwrPt Show
j. What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?
Answer: See Chapter 03 Mini Case PwrPt Show

Common
Common Size
Size Analysis
Analysis and
and Percent
Percent Change
Change Analysis
Analysis
In
In common
common size
size analysis,
analysis, all
all income
income statement
statement items
items are
are divided
divided by
by sales,
sales, and
and all
all balance
balance sheet
sheet items
items are
are divided
divided by
by total
total
assets.
assets.

In
In percent
percent change
change analysis,
analysis, all
all items
items are
are expressed
expressed as
as aa percent
percent change
change from
from the
the first
first year,
year,called
called the
the base
base year,
year,of
of the
the analysis.
analysis.

Common Size Statements

Balance Sheets

2009

2010

2011

Industry

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total Current Assets
Net Fixed Assets
Total Assets

0.6%
3.3%
23.9%
48.7%
76.5%
23.5%
100.0%

0.3%
0.7%
21.9%
44.6%
67.4%
32.6%
100.0%

0.4%
2.0%
25.0%
48.8%
76.2%
23.8%
100.0%

0.3%
0.3%
22.4%
41.2%
64.1%
35.9%
100.0%

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total common equity
Total liabilities and equity

9.9%
13.6%
9.3%
32.8%
22.0%
45.2%
100.0%

11.2%
24.9%
9.9%
46.0%
34.6%
19.3%
100.0%

10.2%
8.5%
10.8%
29.6%
14.2%
56.2%
100.0%

11.9%
2.4%
9.5%
23.7%
26.3%
50.0%
100.0%

2009

2010

2011

Industry

100.0%
83.4%
9.9%
0.6%
6.1%
1.8%
4.3%
1.7%
2.6%

100.0%
85.4%
12.3%
2.0%
0.3%
3.0%
-2.7%
-1.1%
-1.6%

100.0%
82.4%
8.7%
1.7%
7.1%
1.1%
6.0%
2.4%
3.6%

100.0%
84.5%
4.4%
4.0%
7.1%
1.1%
5.9%
2.4%
3.6%

Income Statements

Net sales
Costs of Goods Sold
Other Expenses
Depreciation
EBIT
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends

Percentage Change Analysis

Balance Sheets

2009

2010

2011

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total Current Assets
Net Fixed Assets
Total Assets

0%
0%
0%
0%
0%
0%
0%

-19.1%
-58.8%
80.0%
80.0%
73.2%
172.6%
96.5%

55.6%
47.4%
150.0%
140.0%
138.4%
142.7%
139.4%

Liabilities and equity

Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total common equity
Total liabilities and equity

0%
0%
0%
0%
0%
0%
0%

122.5%
260.0%
109.5%
175.9%
209.2%
-16.0%
96.5%

147.1%
50.0%
179.4%
115.9%
54.6%
197.9%
139.4%

2009

2010

2011

0%
0%
0%
0%
0%
0%
0%
0%
0%

70.0%
73.9%
111.8%
518.8%
-91.7%
181.6%
-208.2%
-208.2%
-208.2%

105.0%
102.5%
80.3%
534.9%
140.4%
28.0%
188.3%
188.3%
188.3%

Income Statements

Net sales
Costs of Goods Sold
Other Expenses
Depreciation
EBIT
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income before preferred dividends

e sheet
ce
sheet items
items are
are divided
divided by
by total
total

ar,
ar,called
called the
the base
base year,
year,of
of the
the analysis.
analysis.