Case Study: Troubled Computer Company, Inc.

Submitted By culiman03
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Pages: 4
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Troubled Computer Company, Inc.
1. Using the information, consider the following:
a. Cash Flow: Positive CF in 1990 with $89M and $125M, but a negative CF in 1992 with ($60m+)
b. Results of Operations: In order to reduce costs, they sold business segments, discontinued produce lines, and curtailed certain development stage projects, reduce employees, try to reduce cost by centralizing its worldwide administration, reducing hardware R&D expenditures, reduce sale of its manufacturing operations. They tried to focus more on improving the management of inventory and receivables to improve cash flow, due to decline of value in its inventory and facilities, it wrote off series of write-downs in 1990-1992.
c. Debt/Equity: By looking at this, as the years went by it got worse. It went from 3.67, 25.90, -4.72. It increased which means that they are using most of their equity and debt to finance their company and putting it at risk. The negative means that they told have enough equity, to finance its debts.
d. Liquidity and Solvency issues:
Liquidity: Working capital: it measures the efficiency in ST. It went from 210.3, 119.2, (13.7), as time went by the company efficiency went down, because they weren’t able to efficiency run the company using their ST resources.
Current Ratio: Ability to pay ST obligations. 1.24, 1.68. 0.98. According to experts, being from 1.2-2 would be a good thing. They were able to do well in 1990 and 1991, but in 1992, they fell below and incurred a deficit in CF and their ability to pay the ST obligations lessens.
Solvency: Debt to Asset: financial leverage. 0.786, 0.96, 1.27. As the number goes higher, they are using more risk in the company.
LT Debt to Assets: measure assets that are finance with LT debt. 0.287, 0.35, 0.42. As years are going by the LT debt is increasing, even though the company tired to reduce their debt by reducing their expenses.
2. Do you think mgmt steps were effective?
If I’m basing it on the pass 3 years, then yes mgmt has been able to reduce some of the cost; however, after completing the ratios, you can definitely tell that TCC has a lot of liquidity and solvency issues. It seemed that the steps that mgmt had taken was somewhat effective in 1990 and 1991, but once it hit 1992, everything went downhill from there. All of their financial leverage increased, well their CF decrease, and they had a lot of ST obligations and LT obligations, even though they tried to reduce it as much as possible. By closing down the plants that were insignificant didn’t really help the company. Based on my opinion, they recovered their cost mainly from firing employees.
3. How could you feel?
Just by looking at the financial statements, I can tell that the company is in deep trouble and it would take a LONG time before the company can recover especially since technology is always evolving and by reducing R&D it will be a disadvantage to us because we are a technology company. Even thought we
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