# The first part of the case, presented in Chapter 7, discussed the situation of Computron Industries after

## Question:

The first part of the case, presented in Chapter 7, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2012, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival. 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 2011 and 2012 balance sheets and income statements, together with projections for 2013, are shown in the following tables. The tables also show the 2011 and 2012 financial ratios, along with industry average data. The 2013 projected financial statement data represent Cochran's and Meissner's best guess for 2013 results, assuming that some new financing is arranged to get the company "over the hump."

Note: "E" denotes "estimated"; the 2013 data are forecasts.

Note: "E" denotes "estimated"; the 2013 data are forecasts.

Note: "E" denotes "estimated."

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.

a. Why are ratios useful? What three groups use ratio analysis and for what reasons?

b. Calculate the 2013 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2011, 2012, and as projected for 2013? We often think of ratios as being useful (1) to managers to help run 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?

c. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against that of other firms in its industry?

d. Calculate the 2013 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?

e. Calculate the 2013 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

f. Calculate the 2013 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?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Computron?

h. Use the extended Du Pont equation to provide a summary and overview of Computron's financial condition as projected for 2013. What are the firm's major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance?

## Step by Step Answer:

**Related Book For**

## Intermediate Financial Management

**ISBN:** 978-1111530266

11th edition

**Authors:** Eugene F. Brigham, Phillip R. Daves