A.

)
Ratios are useful because it facilitates in comparing one company over time and
from one company to another. Ratios are also used by managers to evaluate and help
improve the companys performance as well as what will be the companys standing
compared to other firms. The three groups that use ratio analysis are managers, potential
lenders and stockholders. Managers use it to identify and solve different situations.
Potential lenders, in the other hand, use it to determine whether the company is a good
investment. And stockholders use it to forecast future earnings and dividends.
B. )
current assets 2680000
Current ratio = current liability = 1039800 = 2.58

Current AssetsInventory 26800001716480

Quick ratio = = = 0.93
Current Liabilities 1039800

As computed above, the ratios are below the industry average however it is
apparent that the ratios in 2017 made progress as compared to 2016 and 2015.

C.)
Sales $7,035,600
Inventory Turnover = Inventory
= $1,716,480
= 4.10

Receivables $878,000
DSO = /365
= $7,035,600
= 45.5 Days

Sales $7,035,600
Fixed Assets Turnover =
= $836,840
= 8.41

Sales $7,035,600
Total Assets Turnover =
= $3,516,952
= 2.0

As observed, the Inventory Turnover ratio has been decreasing but the Days Sales
Outstanding (DSO) has been increasing. The Fixed Assets Turnover ratio is higher than
the 2016 ratio but lower than the 2015 ratio.
Computrons utilization of assets can be compared to other firms in the industry by
comparing its Inventory turnover, DSO, Fixed Asset turnover and Total Asset turnover
ratios to the industrys. Computrons DSO and Fixed Asset turnover are above the
industrys but its Inventory turnover and Total Asset turnover ratios are below the
industrys average.
The fact that its DSO is above the industrys average is bad news. Moreover, the
reason why its Fixed Asset Turnover is above the industrys average may be caused by
 its longer period of existence which is why its fixed assets are older and has been
depreciated more; or its fixed asset costs are lower than other firms in the industry.

D.)
Total Liabilities $1,039,800+$500,000
Debt Ratio= Total Assets
= $3,516,952
= 43.8%

EBIT $502,640
Times, Interest Earned= Interest = $80,000
= 6.3

Lease Loan Lease

EBITDA Coverage = EBITDA / Interest
Payments Repayments Payments

($502,640 + $120,000 + $40,000)

= ($80,000 + $40,000)
= 5.5

The companys debt ratio is highest in 2016 than in 2015, 2017 and in the
average industry which can be interpreted that the company must require a portion
of its cash flow to the payment of debts.
The companys TIE is better than the industry average which has a value of
6.2. Higher T.I.E. is favorable because it means the company presents less of a
risk to potential users in terms of solvency. 2016 is very low that it is considered risky
because it is unstable.

The EBITDA coverage is lower, reflecting the firms higher lease obligations.

E. )
Net Income 253584
Profit margin = Sales
= 7035600 = 0.036 or 3.6%

EBIT 502640
Basic Earning Power = Total Assets = 3516952 = 0.143 or 14.3%

Net Income 253584

Return on Assets = Total Assets = 3516952 = 0.072 or 7.2%

Net Income 253584

Return on Equity = Total Equity = 1977152 = 0.128 or 12.8%

The computed ROE, ROA, and BEP are all below the industry average,
nevertheless it is evident that all those figures has improved from 2015 and 2016 rates.
 The profit margin of 2017 exceeded that of in 2015 and 2016, and actually leveled with
the industry average.

F.)
Net Income $253,584
EARNINGS PER SHARE = = = $1.0143
Outstanding Shares $250,000

Price per Share $12.17

PRICE PER EARNINGS ratio = Earnings per Share
= $1.0143
= 12.0

Net Income+Depreciation $253,584+$120,000

CASH FLOW PER SHARE = Outstanding Shares
= 250,000
= $1.49

Price per Share $12.17

PRICE PER CASH FLOW ratio = = = 8.2
Cash Flow per Share $1.49

Common Equity $1,977,152

BOOK VALUE PER SHARE = Outstanding Shares
= 250,000
= $7.91

Price per Share $12.17

MARKET PER BOOK ratio = Book Value per Share
= $7.91
= 1.54

The Price per Earnings and the Market per Book ratios are higher than the previous
years But both of these ratios are lower than the industrys ratio. This may lead the
investors to have a low opinion to the firm.
However, as we have read, the most obvious and widely discussed problem in P/E
ratio is that the denominator considers non-cash items. Earnings figure can easily be
manipulated by playing with non-cash items, for example, depreciation or amortization. If
it is not manipulated deliberately, earnings figure is still affected by non-cash items. That
is why a large number of investors are now using Price/Cash Flow Ratio which removes
non-cash items and considers cash items only.
If we are to consider the Price per Cash Flow ratio which is significantly lower than
the previous year (8.2 vs. 27.5) but it is higher than the industrys (8.2 vs. 7.6). This may
lead to high opinions from investors.

G.)
To make the common size balance sheets, we divide all items in a year by the total
assets. And for the common size income statements, we divide all items in a year by the
sales.
Common Size Balance Sheets
Assets
2015 2016 2017e Industr
y
Cash 0.6% 0.3% 0.4% 0.3%
Short Term Investments 3.3% 0.7% 2.0% 0.3%
Accounts Receivable 23.9% 21.9% 25.0% 22.4%
Inventories 48.7% 44.6% 48.8% 41.2%
Total Current Assets 76.5% 67.4% 76.2% 64.1%
Gross Fixed Assets 33.4% 41.7% 34.7% 53.9%
Less Accumulated Depreciation 10.0% 9.1% 10.9% 18.0%
Net Fixed Assets 23.5% 32.6% 23.8% 35.9%
Total Assets 100.0 100.0 100.0 100.0%
% % %

Liabilities And Equity 2015 2016 2017e Industr

y
Accounts Payable 9.9% 11.2% 10.2% 11.9%
Notes Payable 13.6% 24.9% 8.5% 2.4%
Accruals 9.3% 9.9% 10.8% 9.5%
Total Current Liabilities 32.8% 46.0% 29.6% 23.7%
Long-Term Debt 22.0% 34.6% 14.2% 26.3%
Common Stock (100,000 31.3% 15.9% 47.8% 20.0%
Shares)
Retained Earnings 13.9% 3.4% 8.4% 30.0%
Total Equity 45.2% 19.3% 56.2% 50.0%
Total Liabilities And Equity 100.0 100.0 100.0 100.0%
% % %
 Common Size Income 2015 2016 2017e Industr
Statement y
Sales 100.0 100.0 100.0 100.0%
% % %
Cost Of Goods Sold 83.4% 85.4% 82.4% 84.5%
Other Expenses 9.9% 12.3% 8.7% 4.4%
Depreciation 0.6% 2.0% 1.7% 4.0%
Total Operating Costs 93.9% 99.7% 92.9% 92.9%
EBIT 6.1% 0.3% 7.1% 7.1%
Interest Expense 1.8% 3.0% 1.1% 1.1%
EBT 4.3% -2.7% 6.0% 5.9%
Taxes (40%) 1.7% -1.1% 2.4% 2.4%
Net Income 2.6% -1.6% 3.6% 3.6%

In relation to the financial statements above, it shows that Computron has higher
proportion with regards to inventory and current assets than the industry. Also, there has
slightly more equity in the company which means that the company has less debt than
the industry average. Giving it more short-term debt but less of long-term debt as what
the results convey.

Another thing is that the company has lower Cost of Goods Sold but has incurred higher
other expenses than the industry that led to similar EBIT for the company and the
industry.

H.)
Du Pont Equation = Profit Margin x Total Assets Turnover x Equity Multiplier
Total Assets
= Profit Margin x Total Assets Turnover x Total Equity

3516952
= 3.6% x 2.0 x 1977152

= 3.6% x 2.0 x 1.78

= 0.1282 or 12.8% 13%

Strengths : The profit margin leveled with the industry average despite of having
a debt ratio thats been on the rise since 2015 ( although below the industry average),
this might indicate that the entity has a good sense of managing its costs or it might have
 been a result from an increase in sales. Fixed Assets Turnover ratio in 2017 is higher
than of with industry average regardless of its decline in 2016, this might imply that the
firm is managing its fixed assets productively to generate sales.

Weaknesses : All other ratios, including activity or turnover ratios, and liquidity
ratios are lower than the industry average. It could be a result from poor management of
assets (except its fixed assets) to generate sales, and a poor performance to meet its
obligations when due.

I.) Financial ratio analysts must understand the potential problems and basic
limitations associated with ratio analysis. Too frequently, decisions are based only in
these computations but they are only as good as the data upon which they are based,
the information with which they are compared, and the context in which they are
being interpreted.
Some potential problems and limitations of financial ratio analysis are:

A. Comparing with the industrys average is difficult if the company operates

multiple divisions
Diversification within an industry can also limit the usefulness of financial
analysis. Many companies today are so diversified that they cannot be classified
by industry. When companies have significant operations in different lines of
business, segmented information reported in the notes to the financial statements
can assist the analyst in better understanding the company's operations.

B. Varying operating and accounting method used may mislead comparison.

The use of different alternatives can make a significant difference in the
ratios calculated. Several studies have analyzed the impact of different accounting
policies on financial statement analysis. The differences in profits that can develop
are staggering in some cases. The average reader may find it difficult to grasp all
of these differences, but analysts must be aware of the potential pitfalls if they are
to be able to make the proper adjustments.

C. Some techniques used such as Window Dressing could make ratios look
better.
It must be recognized that a substantial amount of important information is
not included in a company's financial statements, whether intentional or not.
Events involving such things as industry changes, human resources including
management changes, competitors' actions, technological developments,
government actions, and union activities are often critical to a company's
successful operation. These events occur continuously, and information about
 them must come from careful analysis of news releases, interim and other financial
reports, and other sources.
D. Some factors such as economic and seasonal factors may misstate ratios.
It is essential that the analyst understand the impact economic factors may
have on the financial results. During periods of severe economic recessions,
horizontal analyses and ratios compared across years can lose much of their
relevance. When companies experience losses, it is difficult to calculate
percentages and ratios, much less interpret them. Vertical analysis becomes more
useful in such times. One must use the financial information, along with the non-
financial information, to try to assess what changes relate to the economic situation
and what changes relate to factors that management can, and should be able to,
control.

E. Judging whether a ratio is Good or Bad is sometimes difficult to achieve.

F. It is also difficult to tell if the company is in a strong or weak position, or on
balance.
G. It is not necessarily mean that an Average performance is good.

J.) Topmost analysts recognize that certain qualitative factors must be considered when
evaluating companys likely future financial performance. According to Association Of
Individual Investors (AAII), these factors are summarized as follows:

1. Are the companys revenues tied to one key customer?

2. To what extent are the companys revenues tied to one key product?

3. To what extent does the company rely on a single supplier?

4. What percentage of the companys business is generated overseas?

5. Competition

6. Future prospects

7. Legal and regulatory environment