Chapter 3 Mini Case (pages 118 -120) A. Ratios allow you to compare a firm’s performance with that of other firms in the same industry and evaluate trends in the firm’s financial position over time. Ratios are used by managers to identify situations needing attention; potential lenders use them to determine whether a company is creditworthy; and stockholders use ratios to help predict future earnings, dividends, and free cash flow. B. Current ratio = ($2,680,112 / $1,039,800) = 2.58
Quick ratio = (($2,680,112 - $1,716,480)/$1,039,800) = 0.93
The company’s current and quick ratios decreased from 2009 to 2010 but the largest in 2011. The current and quick ratios for 2011 are below the industry average. I believe each type of analyst has interest in these liquidity ratios but each have a different reasoning for each of them. C. Inventory Turnover = ($7,035,600 / $1,716,480) = 4.10
DSO = (($878,000 / ($7,035,600/365)) = 45.55
Fixed assets turnover = ($7,035,600 / $836,840) = 8.41
Total assets turnover = ($7,035,600 / $3,516,952) = 2.0
The company’s inventory turnover has declined each year and is below the industry average. The company’s DSO has been steadily increasing over the years and is above the industry average. The company’s fixed assets turnover decreased from 2009 to 2010 but increased from 2010. The fixed assets turnover is also above the industry average. Lastly, the total assets turnover decreased from 2009 to 2010 but stayed the same from 2010 to 2011. It is also below the industry average. D. Debt ratio = (($1,039,800 + $500,000)/$3,516,952) = 43.78%.
TIE = $502,640/$80,000 = 6.28
EBITDA coverage = ($502,640 + $120,000 + $40,000)/($80,000 + $40,000) = 5.52
Computron’s debt ration drastically improved from 2010 and it has gone back to be lower than it was in 2009 and the industry average. The company’s TIE and EBITDA