Donna Jamison was recently hired as a financial analyst by Computron Industries, 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:

Other Data 2012 2011
December 31 stock price................$ 6.00..................$ 8.50
Number of shares......................100,000.................100,000
Dividends per share.....................$ 0.22...................$ 0.22
Lease payments.......................$ 40,000................$ 40,000
Industry Average Data for 2012
Ratio Industry Average
Current..........................................................2.7×
Quick............................................................1.0×
Inventory turnover.............................................6.0×
Days sales outstanding (DSO) ........................32.0 days
Fixed assets turnover........................................10.7×
Total assets turnover..........................................2.6×
Debt ratio.....................................................50.0%
TIE...............................................................2.5×
Fixed charge coverage.........................................2.1×
Net profit margin..............................................3.5%
ROA............................................................9.1%
ROE...........................................................18.2%
Price/earnings.................................................14.2×
Market/book...................................................1.4×
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 2012 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 thereby 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?
Accounts receivable.....................$ 402..............Debt..................................$ 965
Other current assets ........................888
Net fixed assets..............................361............Equity...................................686
Total assets................................$1,651........Total liabilities and equity............$1,651
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 and limitations?

Balance Sheets 2011 Assets Cash Accounts receivable Inventories 52,000 402,000 836,000 $1,290,000 527,000 166,200 360,800 57,600 351,200 715,200 $1,124,000 491,000 (146,200) $ 344,800 Total current assets Gross fixed assets Less: Accumulated depreciation - Net fixed assets Total assets Liabilities and Equity Accounts payable Notes payable Accruals $ 175,200 225,000 140,000 $ 540,200 424,612 460,000 225,988 685,988 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $663,768 Total current liabilities Long-term debt Common stock (100,000 shares) Retained earnings Total equity Total liabilities and equity Income Statements 2012 2011 Sales Cost of goods sold Other expenses Depreciation Total operating costs EBIT Interest expense EBT Taxes (40%) Net income $3,850,000 (3,250,000) 430,300) 20,000) $3,700,300 $149,700 76,000) $ 73,700 29,480 $44,220 $0.442 S 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 Statement of Cash Flows (2012) Operating Activities Net income Additions (sources of cash) $ 44,220 Depreciation Increase in accounts payable Increase in accruals 20,000 29,600 4,000 Subtractions (uses of cash) Increases in accounts receivable 50,800) Increase in inventories Net cash flow from operations S(73,780) Long-Term Investing and Financing Activities Investment in fixed assets Increase in notes payable Increase in long-term debt Payment of cash dividends $(36,000) $ 25,000 101,180 22,000 Net cash flow from investin Net reduction in cash account Cash at beginning of year Cash at end of year g and financing $104,180 ( 5,600) 57,600 52,00