You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The
You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety helmets. Your boss has asked you to perform a comprehensive analysis of the company’s financial statements, including comparing Lydex’s performance to its major competitors. The company’s financial statements for the last two years are as follows:
| Lydex Company Comparative Balance Sheet |
||||
| This Year | Last Year | |||
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 1,010,000 | $ | 1,250,000 |
| Marketable securities | 0 | 300,000 | ||
| 2,900,000 | 2,000,000 | |||
| Inventory | 3,650,000 | 2,000,000 | ||
| Prepaid expenses | 270,000 | 210,000 | ||
| Total current assets | 7,830,000 | 5,760,000 | ||
| Plant and equipment, net | 9,620,000 | 9,100,000 | ||
| Total assets | $ | 17,450,000 | $ | 14,860,000 |
| Liabilities and |
||||
| Liabilities: | ||||
| Current liabilities | $ | 4,060,000 | $ | 3,080,000 |
| Note payable, 10% | 3,700,000 | 3,100,000 | ||
| Total liabilities | 7,760,000 | 6,180,000 | ||
| Stockholders' equity: | ||||
| Common stock, $70 par value | 7,000,000 | 7,000,000 | ||
| Retained earnings | 2,690,000 | 1,680,000 | ||
| Total stockholders' equity | 9,690,000 | 8,680,000 | ||
| Total liabilities and stockholders' equity | $ | 17,450,000 | $ | 14,860,000 |
| Lydex Company Comparative Income Statement and Reconciliation |
||||
| This Year | Last Year | |||
| Sales (all on account) | $ | 15,910,000 | $ | 14,080,000 |
| Cost of goods sold | 12,728,000 | 10,560,000 | ||
| Gross margin | 3,182,000 | 3,520,000 | ||
| Selling and administrative expenses | 912,000 | 1,624,000 | ||
| Net operating income | 2,270,000 | 1,896,000 | ||
| Interest expense | 370,000 | 310,000 | ||
| Net income before taxes | 1,900,000 | 1,586,000 | ||
| Income taxes (30%) | 570,000 | 475,800 | ||
| Net income | 1,330,000 | 1,110,200 | ||
| Common dividends | 320,000 | 555,100 | ||
| Net income retained | 1,010,000 | 555,100 | ||
| Beginning retained earnings | 1,680,000 | 1,124,900 | ||
| Ending retained earnings | $ | 2,690,000 | $ | 1,680,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
| 2.3 | ||
| Acid-test ratio | 1.1 | |
| Average collection period | 32 | days |
| Average sale period | 60 | days |
| Return on assets | 9.8 | % |
| Debt-to-equity ratio | 0.7 | |
| Times interest earned ratio | 5.8 | |
| Price-earnings ratio | 10 | |
Required:
1. You decide first to assess the company’s performance in terms of debt management and profitability. Compute the following for both this year and last year: (Round your "Percentage" answers to 1 decimal place and other answers to 2 decimal places.)
a. The times interest earned ratio.
b. The debt-to-equity ratio.
c. The gross margin percentage.
d. The return on total assets. (Total assets at the beginning of last year were $13,120,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,124,900. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
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