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Total current assets 1,180$ 1,400$ 1,300$
Net Fixed Assets 2,900 3,500 3,700
Total Assets 4,080$ 4,900$ 5,000$
Accounts payable 300$ 400$ 330$
Notes payable 50 250 100
Total current liabilities 550$ 890$ 700$
Long-term bonds 800 1,100 1,100
Total liabilities 1,350$ 1,990$ 1,800$
Common stock (100,000 shares) 1,000 1,000 1,000
Retained earnings 1,730 1,910 2,200
Total common equity 2,730$ 2,910$ 3,200$
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Additional Information Projection
2018 2019 2020E
Year-end common stock price $50.00 $30.00 $49.00
Shares outstanding (millions) 100 100 100
Common dividends (millions) $90 $84 $100
Tax rate 25% 25% 25%
Additions to retained earnings (millions) $279 $180 $290
Lease payments (millions) $20 $20 $20
Per Share Information Projection
2018 2019 2020E
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Profitability ratios 2018 2019 2020E Average
Profit Margin 6.71% 4.40% 5.91% 7.20%
Operating Profit Margin 10.18% 7.67% 9.39% 10.40%
Basic Earning Power 13.7% 9.4% 12.4% 15.6%
Return on Assets 9.0% 5.4% 7.8% 10.8%
Return on Equity 13.5% 9.1% 12.2% 15.4%
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A B C D E F G H I J K L M N O P Q R S T U
5/25/2019
Computron’s Balance Sheets (Millions of Dollars) Projection
2018 2019 2020E
Assets
Cash and equivalents 60$ 50$ 60$
Short-term investments 100 10 50
Accounts receivable 400 520 530
Inventories 620 820 660
Total liabilities and equity 4,080$ 4,900$ 5,000$
Income Statements (Millions of Dollars) Projection
2018 2019 2020E
Net sales 5,500$ 6,000$ 6,600$
Cost of goods sold (Excluding depr.) 4,300$ 4,800$ 5,210$
Depreciationa290$ 320$ 370$
Other operating expenses 350$ 420$ 400$
Earnings before interest and taxes (EBIT) 560$ 460$ 620$
Less interest 68$ 108$ 100$
Pre-tax earnings 492$ 352$ 520$
Taxes (25%) 123$ 88$ 130$
Net Income 369$ 264$ 390$
Notes:
a Computron has no amortization charges.
Book Value Per Share $27.30 $29.10 $32.00
Ratio Analysis
Profit margin 6.7% 4.4% 5.9% 7.2%
Operating profit margin 10.2% 7.7% 9.4% 10.4%
Basic earning power 13.7% 9.4% 12.4% 15.6%
ROA 9.0% 5.4% 7.8% 10.8%
ROE 13.5% 9.1% 12.2% 15.4%
Inventory turnover 7.4 6.2 8.5 9.0
Days sales outstanding 26.5 31.6 29.3 28.0
Fixed assets turnover 1.9 1.7 1.8 3.0
Total assets turnover 1.348 1.224 1.320 1.5
Current 2.1 1.6 1.9 2.5
Quick 1.0 0.7 0.9 1.9
Debt ratio 20.8% 27.6% 24.0% 15.0%
Debt-to-equity ratio 0.31 0.46 0.38 0.22
Liabilities-to-assets ratio 33.1% 40.6% 36.0% 32.0%
Equity multiplier 1.5 1.7 1.6 1.5
TIE 8.2 4.3 6.2 13.0
EBITDA coverage 9.9 6.3 8.4 17.2
Price/earnings (P/E) 13.6 11.4 12.6 16.8
Market/book 1.8 1.0 1.5 2.7
Industry
Industry
Asset Management ratios 2018 2019 2020E Average
Inventory Turnover 7.4 6.2 8.5 9.0
Days Sales Outstanding 26.5 31.6 29.3 28.0
Fixed Asset Turnover 1.9 1.7 1.8 3.0
Total Asset Turnover 1.348 1.224 1.320 1.500
Industry
2018 2019 2020E Average
Liquidity ratios
Current Ratio 2.1 1.6 1.9 2.5
Quick Ratio 1.0 0.7 0.9 1.9
Industry
Debt Management ratios 2018 2019 2020E Average
Debt Ratio 20.8% 27.6% 24.0% 15.0%
Debt-to-Equity Ratio 0.31 0.46 0.38 0.22
Liabilities-to-assets Ratio 33.1% 40.6% 36.0% 32.0%
Equity multiplier 1.49 1.68 1.56 1.47
Times Interest Earned 8.24 4.26 6.20 13.00
EBITDA Coverage Ratio 9.89 6.25 8.42 17.20
Industry
Market Value ratios 2018 2019 2020E Average
Price-to Earnings Ratio 13.6 11.4 12.6 16.8
Market-to-Book Ratio 1.8 1.0 1.5 2.7
Book Value Per Share $27.30 $29.10 $32.00 na
Dividends per share $0.90 $0.84 $1.00 na
See the worksheet with the TAB “Common Size and % Change”
DuPont Analysis
ROE = (Profit margin)(Total asset turnover)(Equity multiplier)
Equity multiplier (EM) = Total liabilities and equity / Common equity
Chapter 3 Mini Case
The first part of the case, presented in the previous chapter, discussed the situation of Computron Industries after an expansion
program. A large loss occurred rather than the expected profit. As a result, its managers, directors, and investors are concerned about
the firm’s survival.
e. 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?
b. Calculate the profit margin, operating 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 three groups use ratio analysis and for what reasons? Answer: See Chapter Mini Case Show
turnover. How does Computron’s utilization of assets stack up against other firms in its industry?
Jenny Cochran was brought in as assistant to Computron’s chairman, who had the task of getting the company back into a sound
financial position. 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, using the recent and projected financial
information shown next. Provide clear explanations, not yes or no answers.
2018
d. Calculate the current and quick ratios based on the projected balance sheet and income statement
data. What can you say about the company’s liquidity position and its trend?
2019
Industry
Average
2020E
f. Calculate the price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low
opinion of the company?
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?
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A B C D E F G H I J K L M N O P Q R S T U
= 9.1%
2020E ROE = 5.9% 1.320 1.563
= 12.2%
Industry:
i. What are some potential problems and limitations of financial ratio analysis? Answer: See Chapter Mini Case Show
j. What are some qualitative factors analysts should consider when evaluating a company’s likely future financial performance?
Answer: See Chapter Mini Case Show
5/25/2019
In percent change analysis, all items are expressed as a percent change from the first year, called the base year, of the analysis.
Common Size Statements
Balance Sheets
Assets 2018 2019 2020E Industry
Cash and equivalents 1.5% 1.0% 1.2% 1.5%
Short-term investments 2.5% 0.2% 1.0% 24.9%
Accounts receivable 9.8% 10.6% 10.6% 11.5%
Inventories 15.2% 16.7% 13.2% 12.1%
Total Current Assets 28.9% 28.6% 26.0% 50.0%
Net Fixed Assets 71.1% 71.4% 74.0% 50.0%
Total Assets 100.0% 100.0% 100.0% 100.0%
Accounts payable 7.4% 8.2% 6.6% 6.8%
Notes payable 1.2% 5.1% 2.0% 3.0%
Total current liabilities 13.5% 18.2% 14.0% 20.0%
Long-term bonds 19.6% 22.4% 22.0% 12.0%
Total liabilities 33.1% 40.6% 36.0% 32.0%
Common stock (100,000 shares) 24.5% 20.4% 20.0% 27.2%
Retained earnings 42.4% 39.0% 44.0% 40.8%
Total common equity 66.9% 59.4% 64.0% 68.0%
Total liabilities and equity 100.0% 100.0% 100.0% 100.0%
Income Statements 2018 2019 2020E Industry
Net sales 100.0% 100.0% 100.0% 100.0%
COGS except depr. 78.2% 80.0% 78.9% 69.0%
Depreciation 5.3% 5.3% 5.6% 3.3%
Other Expenses 6.4% 7.0% 6.1% 17.3%
Less interest 1.2% 1.8% 1.5% 0.8%
Pre-tax earnings 8.9% 5.9% 7.9% 9.6%
Taxes (25%) 2.2% 1.5% 2.0% 2.4%
Net Income 6.7% 4.4% 5.9% 7.2%
Common Size Analysis and Percent Change Analysis
In common size analysis, all income statement items are divided by sales, and all balance sheet items
are divided by total assets.
Percentage Change Analysis
Balance Sheets
Assets 2018 2019 2020E
Cash and equivalents 0% -16.7% 0.0%
Short-term investments 0% -90.0% -50.0%
Accounts receivable 0% 30.0% 32.5%
Total Current Assets 0% 18.6% 10.2%
Net Fixed Assets 0% 20.7% 27.6%
Total Assets 0% 20.1% 22.5%
Liabilities and equity
Accounts payable 0% 33.3% 10.0%
Notes payable 0% 400.0% 100.0%
Accruals 0% 20.0% 35.0%
Total current liabilities 0% 61.8% 27.3%
Long-term bonds 0% 37.5% 37.5%
Total liabilities 0% 47.4% 33.3%
Common stock (100,000 shares) 0% 0.0% 0.0%
Retained earnings 0% 10.4% 27.2%
Total common equity 0% 6.6% 17.2%
Total liabilities and equity 0% 20.1% 22.5%
Income Statements 2018 2019 2020E
Net sales 0% 9.1% 20.0%
Costs of Goods Sold 0% 11.6% 21.2%
Depreciation 0% 10.3% 27.6%
Other Expenses 0% 20.0% 14.3%
EBIT 0% -17.9% 10.7%
Less interest 0% 58.8% 47.1%
Pre-tax earnings 0% -28.5% 5.7%
Taxes (25%) 0% -28.5% 5.7%
Net Income 0% -28.5% 5.7%
In percent change analysis, all items are expressed as a percent change from the first year, called the
base year, of the analysis.