Donna Jamison was brought in as assistant to Fred Campo, Computron’s chairman, who had the task of getting the
company back into a sound financial position. Computron’s 2006 and 2007 balance sheets and income statements,
together with projections for 2008, are shown in the following tables. Also, the tables show the 2006 and 2007
financial ratios, along with industry average data. The 2008 projected financial statement data represent Jamison’s
and Campo’s best guess for 2008 results, assuming that some new financing is arranged to get the company “over
the hump.”
Balance Sheets
Assets
2006
2007
2008E
Cash
Short-term investments
Accounts receivable
Inventories
Total current assets
Gross fixed assets
Less: Accumulated depreciation
Net fixed assets
Total assets
$ 9,000
$ 7,282
$14,000
48,600
20,000
71,632
351,200
632,160
878,000
715,200
1,287,360
1,716,480
$1,124,000
$1,946,802
$2,680,112
491,000
1,202,950
1,220,000
146,200
263,160
383,160
$ 344,800
$ 939,790
$ 836,840
$1,468,800
$2,886,592
$3,516,952
===================================
Liabilities and Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term debt
Common stock
(100,000 shares)
Retained earnings
Total equity
Total liabilities and equity
$145,600
200,000
136,000
$481,600
323,432
460,000
$ 324,000
720,000
284,960
$1,328,960
1,000,000
460,000
$ 359,800
300,000
380,000
$1,039,800
500,000
1,680,936
203,768
97,632
296,216
$663,768
$ 557,632
$1,977,152
$1,468,800
$2,886,592
$3,516,952
===================================
Income Statements
Sales
Cost of goods sold
Other expenses
Depreciation
Total operating costs
EBIT
Interest expense
EBT
Taxes (40%)
Net income
$3,432,000
$5,834,400
$7,035,600
2,864,000
4,980,000
5,800,000
340,000
720,000
612,960
18,900
116,960
120,000
$3,222,900
$5,816,960
$6,532,960
$209,100
$17,440
$502,640
62,500
176,000
80,000
$ 146,600
($ 158,560)
$ 422,640
58,640
(63,424)
169,056
$ 87,960
($95,136)
$ 253,584
==================================
2006
2007
$8.05
100,000
$0.880
$0.220
40%
$ 6.638
$40,000
$6.00
100,000
($0.951)
0.110
40%
$ 5.576
$40,000
2008E
Other Data
Stock price
Shares outstanding
EPS
DPS
Tax rate
Book value per share
Lease payments
Ratio Analysis
Current
Quick
Inventory turnover
Days sales outstanding
Fixed assets turnover
Total assets turnover
Debt Ratio
TIE
EBITDA coverage
Profit Margin
Basic earning power
ROA
ROE
Price/earnings (P/E)
Price/cash flow
Market/book
2006
2.3X
0.8X
4.8X
37.3
10.0X
2.3X
54.8%
3.3X
2.6X
2.6%
14.2%
6.0%
13.3%
9.7X
8.0X
1.3X
2007
1.5X
0.5X
4.5X
39.6
6.2X
2.0X
80.7%
0.1X
0.8X
21.6%
0.6%
23.3%
217.1%
26.3X
27.5X
1.1X
2008E
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$12.16
100,000
$1.014
0.220
40%
$ 7.909
$40,000
Industry
Average
2.7X
1.0X
6.1X
32.0
7.0X
2.5X
50.0%
6.2X
8.0X
3.6%
17.8%
9.0%
17.9%
16.2X
7.6X
2.9X
Note: “E” indicates estimated. The 2008 data are
Jamison examined monthly data for 2007 (not given in the detected an improving pattern during the
year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a
small profit by December. Thus, the annual data looked somewhat worse than final monthly data. Also,
it appeared to be taking longer for the advertising program to get the message across, for the new sales
offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words,
the lags between spending money and deriving benefits were longer than Computron’s managers had
anticipated. For these reasons, Jamison and Campo see hope for the company—provided it can survive
in the short run.
Jamison 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 are the five major categories of ratios?
b. Calculate the 2008 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 2006, 2007, and as
projected for 2008? 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?
c. Calculate the 2008 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 2008 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 2008 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 2008 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 percent 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 2008. 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 analysts should consider when evaluating a company’s likely future
financial performance?