Mini Case - Chapter 3
Computron Industries – Jamison Analysis
Mini Case - Chapter 3
Computron Industries, a manufacturer of electronic calculators, has been going through some growth over the course of the 2007 and 2008 years. Some components of this growth include new sales offices, additional plant capacity and a costly advertising campaign. However, execution of this growth is subpar, and has led to suppliers and lenders being paid late, bank complaints, and threats to cut off credit from lenders. To add insult to injury, Computron Industry’s stockholders are unhappy because of these complaints, and an overall unhealthy balance sheet. As such, the intent of this document is to indentify the financial impact of this expansion to Computron, and determine if expansion has provided any Market Value Added, (MVA), for Computron shareholders. The expansion of Computron industries, according to the Balance Sheet found in appendix A, yielded a negative net income for 2008 of ($95,136). This is a change from 2007’s positive net income of $87,960 or a net income difference between 2007 and 2008 of ($183,096). However, sales between years 2007 and 2008 increased by over $2.4 million, (see Sales under Income Statements on the Balance sheet found in appendix A). Similarly, according the Computron’s Balance Sheet, (appendix A), fixed assets increased by over $1.4 million between 2007 and 2008. It is important to note that cash and short-term investments fell. It is likely that this decrease is because Computron choose to fund part of its expansion with cash from the sale of these assets. It is also important to note that the Balance Sheet shows that between 2007 and 2008 current liabilities increased by $847,360. This increase, coupled with an increase in long-term debt from 2007 to 2008 by $676,568, is indicative of debt financed as part of the expansion. To add a bit more clarity of how Computron funded its expansion, take a look at the Statement of Cash Flows for 2008, (see Appendix A). Under the Financing Activities section, notice the positive value shown for notes payable, $520,000, and long-term debt, $676,568. This positive value indicates Computron cash coming into the business in the form of debt financed, or debt borrowed. Conversely, under this same section, the payment of cash dividends line item shows a negative value, ($11,000) – indicative of cash Computron spent. In the case of dividends, the ($11,000), is cash paid out to stockholders. There is, also, compelling evidence showing that even after all of the debt financed, and cash spent to acquire assets and payout dividends, Computron’s cash account only fell by $1,718. Or, the difference between cash at the beginning of year, $9,000 and cash at the end of the year, $7,282. This positive cash value is indicative of cash assets Computron has on hand or in the bank. With Computron showing a positive 2008, end of year cash balance from the Statement of Cash Flow balance sheet, (appendix a), does not necessarily indicate that the company is still able to generate cash after it has expanded its asset base. This cash generation ability is called Computron’s Free Cash Flow, or the amount of cash available from operations for distribution to all investors after capital expenditures like asset expansions, debt financed and dividend payouts. There are (5) fundamental uses of free cash flow: (1) pay interest on debt, (2) pay back principal on debt, (3) pay dividends, (4) buy back stock, (5) buy non-operating assets. In Computron’s case, Free Cash Flow was used to expand sales offices, payoff dividends and pay back principal and interest on debt for loans acquired to support current operations and expansion. The expansion of Computron yielded an overall increase in operating current assets like cash, inventory and receivables. Where operating current assets are the assets used in normal business...