Answer question number b.
| Current Liabilities |
| $1,039,8000 |
= 2.57 times
Liquidity ratio measures the firm’s ability to meet short term obligations which should be paid within a year. The current ration of the Computron Industries in the year 2006 and 2007 was 2.3 and 1.5 times respectively whereas the current ratio in 2008 is 2.57 times. Industry average current ratio is 2.7 times. This shows that the liquidity position of Computorn industries in 2006 and 2007 was relatively lower than current ratio of 2008. In these three years computron’s current ratio is below the industry average but in 2008 it is almost near to the industry average.
| Current Liabilities |
| $1,039,800 |
= 0.93 times
The quick ratio of the Computorn industries in the year 2006 and 2007 was 0.8 and 0.5 times respectively whereas the quick ratio in 2008 is 0.93 times. This shows that the liquidity position of computorn industries in 2006 and 2007 was relatively lower than 2008. This corporation has 2.57 times current ration and only 0.93 times quick ratio which indicate that it has high amount of inventories as the current assets. Therefore, it needs to change its inventory policy. Still, the company has its ability to pay its short term obligations and if it would be able to collect its receivables in time then company can pay off its current liabilities without having to liquidate its inventory.
The different types of analysts have interest in the liquidity ratios and they analyze the same amount of liquidity position from different view:
Managers point of view
Regarding the manager, liquidity ratio suggest them whether the firm should reinvest its income or return to its shareholders. Also liquidity ratio suggests them to see the possible future economic downturns.
Bankers point of view
From creditors’ point of view, they like to see a high current ratio. High current ratio means, firm has enough ability to meet its obligations. When a firm is getting into financial difficulty, it will begin paying its account payable more slowly, borrowing from its bank and so on. So its current liabilities will be increasing and hence lowering the liquidity ratio.
Stockholders point of view
From stockholders’ point of view, high current ratio could mean that the company has a lot of money tied up in nonproductive assets such as excess cash or marketable securities or inventories.
Answer question number C.
| Inventories |
| $1,716,480 |
= 4.09 times.
Computorn’s inventory turnover ratio is much lower than industry average. It has the inventory turnover ratio of 4.09 times where as industry average inventory turnover ratio is 6.1 times. This suggests that Computorn hold excessive inventories. Holding excessive inventory is unproductive because it is nonproductive asset and it gives low rate of return.
| Average Sales per day |
| $7,035,600/3655 |
= 45.54 days ≈ 46 days
Computron’s days sales outstanding is more than industry average. It is the average length of time the firm must wait to receive cash of its credit sales. So lower the days sales outstanding better will be the firm’s credit policy. This company has to wait 46 days to receive the cash where as industry average days sales outstanding is 32 days. This shows that customers, on the average, are not paying their bill on time. This deprives Computron’s funds that it could use to invest in productive assests. Customers are not paying their bill on time.
| Net fixed Assets |
| $836,840 |
= 8.40 times.
Computron’s fixed asset turnover ratio is higher than industry average. It has 8.40 times fixed asset turnover ratio where as industry average fixed asset turnover is 7.0 times. This shows that net fixed asset of Computron industries is low in comparision to the industry average or the company utilizes its plant and equipment more for the same volumes of sales comparing to other firm of the same industry.
| Total Assets |
| $3,516,952 |
= 2.00 times
Computron’s total assets turnover ratio is lower than industry average. It has 2 times total assets turnover ratio where as industry average total assets turnover is 2.5 times. This shows that industry is not generating a sufficient volume of sales given its total asset management. Sales should be increased or some assets should be sold or a combination of these steps should be taken. Beside this, firm’s fixed assets turnover is above industry average but because of excessive amount of current assets, especially inventories and accounts receivables, its total assets turnover is lower. So firm should change its inventories policies and credit policy in order to improve its total assets turnover.
Answer question number d.
| Total Assets |
| $3,516,952 |
= 0.4378 = 43.78%
The debt ratio of computron industries is lower than the industry average. It has 43.78% debt ratio where as industry average debt ratio is 50%. This shows that computron’s creditors have supplied less than half the total financing. More than half of the total financing is financed by equity capital. It means Computron’s financial condition is sound and the firm doesn’t have risk of bankruptcy.
| Interest charge |
| $80000 |
= 6.28 times.
Computron Industry has 2.28 time interest earned ration which is almost same as industry average. The industry average time interest earned ratio is 6.20 times. It suggests that computron has sound ability to pay its interest.
Answer question number e.
| Sales |
| $7,035,600 |
= 3.60%
Profit margin of Computron industries is equal to the industry average i.e. 3.60% equals to 3.60%. This suggests that the cost incurred while operating industry is efficient. Computron Industries’ profit margin is identical with industry average that means their sales, operating costs, EBIT and uses of debt are identical. Its profit margin in 2007 was very bad in negative; however expected profit margin in 2008 is the good.
| Total Assets |
| $3,516,952 |
= 14.29%
Basic Earning Power ratio of Computron industries is lower than the industry average. It has 14.28% BEP ratio where as the industry average BEP ratio is 17.8%. This shows the raw earning power of the firm’s assets, before the influence of taxes and leverage. Because of its low total asset turnover ratio, Computron is not getting as high a return on its assets as is the average company in its industry.
| Total Assets |
| $3,516,952 |
= 7.21%
Ruturn on Assets of Computron industries is below the industry average. The compay has Return on Assets of 7.21% where as the industry average ROA is 9%. This is because of low BEP ratio and high interest cost, deprives the net income to be high.
| Common equity |
| $1,977,152 |
= 12.82%
Ruturn on Equity (ROE) of Computron industries is lower than the industry average. The industry average ROE is 17.9% where as the firm has ROE of 12.82%. This suggests the stockholders investment to get a return on their money. This ratio is somewhat below than industry average but far better than ROE of 2007. Though its ROE in an industry is lower, while analyzing its performance through trend analysis it is improving.
Answer question number f.
| Earnings per share |
| $1.014 |
= 12 times.
The price earning ration of Computron industries is below the industry average. The company has Price Earnings ratio of 12 times whereas industry average is 16.2 times. This suggests that the company is regarded as being somewhat riskier than most of the other company in an industry because of low PE ratio. Certainly this shows that investors are expected to have low opinion of the company. However, looking at its trend, company is expected improve its performance in 2008. Its PE ratio in 2007 was -6.3 times where as in 2008 12 times.
| Cash flow per share |
| $1.49 |
= 8.16 times
Calculation of cashflow per share
| Number of Shares outstanding |
| 250,000 |
= $1.49
The price/cashflow ratio of computron industries is above the industry average. The industry average price/cash flow ratio is 7.6 times whereas firm has 816 times. This suggest that its growth prospects are above average and risk is below average. This ratio indicates that investors are expected to have high opinion of the company because of high price/cash flow ratio than industry average.
| Book value per share |
| $7.909 |
= 1.53 times
The market/book ratio is relatively lower than industry average i.e. the firm has market/book ratio of 1.53 times whereas industry average is 2.9 times. This suggests that Computron industries has to raise common equity to get this ratio high. Investors are expected to have low opinion about the company because of low market/book ratio. However, firm’s this ratio is increases comparing to 2007.
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