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Campsey Computer Company Financial Ratios Analysis

Campsey Computer Company's financial ratios are provided and compared to industry averages. While Campsey's profit margin is higher, its other profitability ratios of return on assets, return on equity, and asset turnover are lower than the industry averages. Specifically, Campsey's days sales outstanding is more than double the industry average, indicating it should tighten its credit and collection policies. If 1989 represented abnormal growth for Campsey, comparing its ratios from that year to industry averages would not provide an accurate picture and could mislead potential investors.

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A B M Moshiuddullah
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18 views2 pages

Campsey Computer Company Financial Ratios Analysis

Campsey Computer Company's financial ratios are provided and compared to industry averages. While Campsey's profit margin is higher, its other profitability ratios of return on assets, return on equity, and asset turnover are lower than the industry averages. Specifically, Campsey's days sales outstanding is more than double the industry average, indicating it should tighten its credit and collection policies. If 1989 represented abnormal growth for Campsey, comparing its ratios from that year to industry averages would not provide an accurate picture and could mislead potential investors.

Uploaded by

A B M Moshiuddullah
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as EHTML, PDF, TXT or read online on Scribd

Data for Campsey Computer Company and its industry averages follow.

CCC: Balance Sheet as 12/31/12 Cash 77,500 A/P Receivable 336,000 N/P Inventories 241,500 Other CL Total CA 655,000 Total CL Net FA 292,500 L-T Debt CE TA 947,500 Total L&E 129,000 84,000 117,000 330,000 256,5000 361,000 947,500

Sales COGS Depreciation Gross Profit Admin & Selling EBIT Interest TI Taxes (40%) Net Income + Dep CF

1,607,500 1,351,000 41,500 215,000 145,000 70,000 24,500 45,500 18,200 27,300

a)

Calculate the indicated ratios for Campsey Ratio Campsey = 1.98 x = 75 Days = 6.66 x = 1.70 x = 0.017 = 1.7% = 0.029 = 2.9% = 0.076 = 7.6% = 0.619 = 61.9% Industry Average 2.0 x 35 Days 6.7 x 3x 1.2% 3.6% 9% 60.0% W Above Industry Should Be Higher Should Be Higher Strengths Weaknesses W

CR DSO Inventory Turnover TAT PM ROA ROE DR

b)

Du Pont Equations for Campsey:

ROA = Profit Margin x Total Asset Turnover

= = (0.0170) (1.6966) = 2.88% ROE = ROA x Equity Multiplier

= = 7.56% Du Pont Equations for Industry: ROA = (1.2%) (3.0) = ROE 3.6%

= ROA x Equity Multiplier

c) Campseys days sales outstanding is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While Campseys profit margin is higher than the industry average, its other profitability ratios are also low compared to the industry. Net income should be higher given the amount of sales, equity, and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. d) If 1989 represents a period of supernormal growth for Campsey, the ratios based on that year will be distorted and a comparison between them and industry averages would have little meaning. Potential investors who look only at 1989 ratios will be misled, and a return to normal conditions in 1990 could hurt the firm's stock price.

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