Spreadsheet: benjamin_rogers__1257__Case 1 Ch 3 version 3
Sheet: Answers

To: Dr. [NAME]
From: [NAME] and [NAME]
Date: June 19, 2000
Chapter 3 Case Study
a. | Financial Ratios are useful because it helps compare and evaluate the financials of your company
 | with other companies through benchmarking the key ratios.
 | Key Ratios:
 | 1. Liquidity
 | 2. Asset Management
 | 3. Debt Management
 | 4. Profitablitity
 | 5. Market Value
b. | 1999 Current Ratio
 | 1999 [NAME]
 | The 1997 liquidity position was slightly below the industry average,and they declined in 1998.  Projections for 1999 show that the company has addressed the problem and should improve.
 | A banker would be most sensitive to liquidity ratios, because a banker is mostly concerned with a parties
 | ability to repay loans/debt and liquidity ratios looks at a companies ability to meet maturing debts.
c. | 1999 Inventory Turnover
 | 1999 DSO
 | 1999 FA Turnover
 | 1999 Op Cap Requirement |  |  | All CA that do not pay interest - CL that do not charge interest + Net PPE divided by sales
 | 1999 TTL Asset Turnover
 | Computron is more efficient than competitors with its fixed assets, but is less efficient with current assets.  Its total asset turnover is not as efficient as the industry average.  This raises the question as to whether more investment in fixed assets would help alleviate the current asset inefficiencies.
d. | 1999 Debt
 | 1999 TIE
 | 1999 Fixed Charge Coverage |  |  | EBIT + Lease Paymentss divided by Interest+ Lease Payments+Sinking Fund Payments(1-T)
 | Computron is leveraged more than the industry average.  [NAME] is really focused on cutting debt in 1999.
e. | 1999 Op Profit AT
 | 1999 Profit Margin
 | 1999 BEP
 | 1999 ROA
 | 1999 ROE
 | Computron is now operating more profitably than the industry average.  However, they need to increase their volume as their returns on assets and equity are below the industry average.
f. | 1999 PE Ratio
 | 1999 Mkt/Book Ratio
 | Investors have a low opinion of Computron, although it is better than in the past.
g. | ROE = Profit margin x TTL Asset TO x Equity Multiplier
 | ROE = Net Income / Sales x Sales / TTL Assets x  TTL Assets / Common Equity
 |  |  |  |  | Industry Average
 |  |  |  |  | 0.035
 |  |  |  |  | 2.6
 | Equity Multiplier |  |  |  | 2
 | The company's major strength is its profit margin.
 | Weaknesses are theTTL Asset Turnover and Equity Multiplier.  The higher debt and less efficient use of assets implies the company is servicing debt for assets that are not being used as efficiently as they should be.
h. | AR |  | 878 |  | LTD |  | 1945
 | Other |  | 1802
 |  |  |  |  | Liabilities
 | CA
 |  |  |  |  | CS |  | 1552
 | Gross FA |  | 817 |  | TTL Equity
 | Acc Dep |  | 0
 | Net FA |  |  |  | TTL L&E
 | TTL Assets |  |  |  |  | Check
 | Improving the DSO margin from 44.9 to 32 would impact the liquidity position of Computron.  Using the numbers given, 252 of A/R would be cash, which could be used to pay down debt.  This would bring the debt ratio down from 55% to 52%, giving the company more stability.  Investors view the stock more favorably as a result of having a more stable, predictable future.
i. Check | Inventory appears to be too high.  Cutting inventory would free cash to pay down debt.  Profitability should not be effected, assuming  storage and requisition costs cancel each other out.  However, lower debt ratio should improve the stock price as investors would perceive the company as more stable.
j. | As a credit manager, I would be highly suspect of Computron. With A/P increasing 3.5x, LT Debt increasing 3x, and negative EBIT, I would consider them a credit risk.  I would want to sell to them COD, even if that risked them as a customer. I would want to understand what their plans were if I were to continue to give them credit and how they would mitigate this risk in the future.
 | As a bank loan officer, I would hesitate to renew the loan to [NAME]. I would likely demand repayment of the loan.  However, if I began to see improvements in their financials, I would consider restructuring the terms of the loan agreement to better suit the improved financial situation.  If I believed those numbers, I would feel my chances of recovering my loan would be better letting them operate then forcing them into bankruptcy.  If $1.2MM of new equity was also included, I would definitely renew the loan. I would use the ratio analysis below to make my decisions.
 |  |  |  |  |  | Debt | Assets | Ratio
 | 1998
 | 1998 w/ new capital |  |  |  |  | 2733
 | 1998 w/ new capital and debt pd down to industry standard (not possible, not enough cash)
 |  |  |  | cash required
 | 1999E |  |  |  |  | 1944 | 3500
 | 1999E w/ new capital |  |  |  |  | 1944 | 3700
 | 1999E w/ new capital and debt pd down to industry standard
 |  |  |  | cash required
k. | In hindsight, [NAME] expanded to quickly.  The company used debt to acquire fixed assets and inventory before its advertising campaign had a chance to work.  The higher costs and inefficient use of assets compound their problems.  The increase of marginal customers increased their credit risk and hurt cash flow as DSO increased.  The company should have taken a more conservative plan that would have saved the large capital investments until the company was sure its advertising campaign was successful.
l. | Large, multidivisional firms may be difficult to compare to other firms.
 | Inflation may distort balance sheets.
 | Seasonal factors may distort ratios.
 | Firms may "window dress" their financial statements.
 | Differing accounting treatments may effect ratio comparisons.
 | Subjectivity is needed to determine what constitutes "good" and "bad" ratios.
m. | Are the company's revenues tied to one key customer?
 | Are the company's revenues tied to one key product?
 | Does the company rely on one key supplier?
 | What percentage of the company's business is generated overseas?
 | How will competition effect the company's business?
 | Does the company have to invest heavily in R&D for future product development?
 | What is the legal and regulatory risk?