Integrative Problem
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.
Balance Sheets                      2015       2016
Assets
Cash                                     $52,000       $57,600
Accounts receivable             402,000       351,200
Inventories                            836,000       715,200
Total current assets             $1,290,000 $1,124,000
Gross fixed assets                527,000       491,000
Less accumulated depreciation 166,200    146,200
Net fixed assets                      $360,800    $344,800
Total assets                         $1,650,800    $1,468,800

Liabilities and Equity
Accounts payables                   $175,200    $145,600
Notes payable                            225,000    200,000
Accruals                                     140,000    136,000
Total current liabilities             $540,200    $481,600
Long-term debt                            424,612       323,432
Common stock (100,000 shares) 460,000       460,000
Retained earnings                      225,988       203,768
Total equity                                  $685,988    $663,768
Total liabilities and equity          $1,650,800 $1,468,800

Income Statements                      2016             2015
Sales                                        $3,850,000    $3,432,000
Cost of goods sold                   (3,250,000)    (2,864,000)
Other expenses                         ( 430,300)    ( 340,000)
Depreciation                            ( 20,000)    ( 18,900)
Total operating costs                $3,700,300    $3,222,900
EBIT                                           $ 149,700    $ 209,100
Interest expense                         ( 76,000)    ( 62,500)
EBT                                           $ 73,700    $ 146,600
Taxes (40%)                               ( 29,480)    ( 58,640)
Net income                                  $ 44,220       $ 87,960
EPS                                                 $0.442          $0.880
Statement of Cash Flows                   (2016)
Operating Activities
Net income                                        $ 44,220
Other additions (sources o f cash)
Depreciation                               20,000
Increase in accounts payable       29,600
Increase in accruals                      4,000
Subtractions (uses of cash)
Increases in accounts receivable ( 50,800)
Increase in inventories                (120,800)
Net cash flow from operations          $( 73,780)
Long-Term Investing Activities
Investment in fixed assets                      $( 36,000)
Financing Activities
Increase in notes payable                      $ 25,000
Increase in long-term debt                      101,180
Payment of cash dividends                   ( 22,000)
Net cash flow from financing          $104,180
Net reduction in cash account                $( 5,600)
Cash at beginning of year                      57,600
Cash at end of year                               $ 52,000

Other Data                                  2016             2015
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 2016:
Ratio                                     Industry Average
Current                                           2.7x
Quick                                              1.0x
Inventory turnover                            6.0x
Days sales outstanding (DSO)       32.0 days
Fixed assets turnover                   10.7x
Total assets turnover                      2.6x
Debt ratio                                        50.0%
TIE                                                    2.5x
Fixed charge coverage                   2.1x
Net profit margin                               3.5%
ROA                                                 9.1 %
ROE                                                 18.2%
Price/earnings                                  14.2x
Market/book                                     1.4x

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 is Computron’s inventory turnover, day’s 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 2016 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 financial statements (shown in thousands below) 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?

Integrative Problem Donna Jamison was recently hired as a financi...