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A B C D E F G H I
12/9/2012
Input Data:
2012 2013 2014
Year-end common stock price $8.50 $6.00 $12.17
Balance Sheets
Assets 2012 2013 2014
Cash and equivalents $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 Dep. $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
Income Statements
2012 2013 2014
Net sales $3,432,000 $5,834,400 $7,035,600
Costs of Goods Sold Except Depr. $2,864,000 $4,980,000 $5,800,000
Depreciation and amortization $18,900 $116,960 $120,000
Jenny Cochran was brought in as assistant to Gary Meissner, Computron’s chairman, who had the task of getting the
company back into a sound financial position. Computron’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 Meissner’s best guess for
2014 results, assuming that some new financing is arranged to get the company “over the hump.”
Chapter 3 Mini Case
The first part of the case, presented in Chapter 3, discussed the situation of Computron 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.
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A B C D E F G H I
EPS $0.880 ($0.951) $1.014
DPS $0.220 $0.110 $0.220
Book Value Per Share $6.638 $5.576 $7.909
Industry
Debt Management ratios 2012 2013 2014 Average
Debt Ratio 35.6% 59.6% 22.7% 32.0%
Industry
Profitability ratios 2012 2013 2014 Average
Net Profit Margin 2.6% -1.6% 3.6% 3.6%
Industry
Market Value ratios 2012 2013 2014 Average
Price-to Earnings Ratio 9.66 -6.31 12.00 14.20
d. Calculate the 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 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can
you say about these ratios?
a. Why are ratios useful? What are the five major categories of ratios? Answer: See Chapter 03 Mini Case 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?
Cochran 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.
(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: See Chapter 03 Mini Case Show
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?
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A B C D E F G H I
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
See the worksheet with the TAB "Common Size and % Change"
DuPont Analysis ROE =
P.M. X
T.A.T.O. X
Equity Multiplier
h. Use the extended DuPont equation to provide a summary and overview of Computron's projected financial condition.
What are the firm's major strengths and weaknesses?
g. Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?
