Donna Jamison was recently hired as a financial analyst by Computron Indus tries a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data:

Statement of Cash Flows (2015)

Assume that you are Donna Jamison’s assistant and that she has asked you to help her prepare a report that evaluates the company’s financial condition. Answer the following questions:
a. What can you conclude about the company’s financial condition from its statement of cash flows?
b. What is the purpose of financial ratio analysis, and what are the five major categories of ratios?
c. What are Computron’s current and quick ratios? What do they tell you about the company’s liquidity position?
d. What are Computron’s inventory turnover days sales outstanding, fixed assets turnover, and total assets turnover ratios? How does the firm’s utilization of assets stack up against that of the industry?
e. What are the firm’s debt, times interest earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?
f. Calculate and discuss the firm’s profitability ratios—that is, its net profit margin, return on assets (ROA), and return on equity (ROE).
g. Calculate Computron’s market value ratios—that is, its price/earnings ratio and its market/book ratio. What do these ratios tell you about investors’ opinions of the company?
h. Use the DuPont equation to provide a summary and overview of Computron’s financial condition. What are the firm’s major strengths and weaknesses?
i. Use the following simplified 2015 balance sheet to show, in general terms, how an improvement in one of the ratios—say, the DSO—would affect the stock price. For example, if the company could improve its collection procedures and there by lower the DSO from 38.1 days to 27.8 days, how would that change “ripple through” the following financial statements ($thousands) and influence the stock price?

j. Although financial statement analysis can provide useful information about a company’s operations and its financial condition, this type of analysis does have some potential problems and limitations, and it must be used with care and judgment. What are some problems andlimitations?

  • CreatedNovember 24, 2014
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