Question

Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6]

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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	$	940,000	$	1,180,000
Marketable securities		0		300,000
Accounts receivable, net		2,620,000		1,720,000
Inventory		3,580,000		2,300,000
Prepaid expenses		250,000		190,000
Total current assets		7,390,000		5,690,000
Plant and equipment, net		9,480,000		9,030,000
Total assets	$	16,870,000	$	14,720,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	3,990,000	$	2,940,000
Note payable, 10%		3,660,000		3,060,000
Total liabilities		7,650,000		6,000,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		1,720,000		1,220,000
Total stockholders' equity		9,220,000		8,720,000
Total liabilities and stockholders' equity	$	16,870,000	$	14,720,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,840,000	$	13,380,000
Cost of goods sold		12,672,000		10,035,000
Gross margin		3,168,000		3,345,000
Selling and administrative expenses		1,602,000		1,596,000
Net operating income		1,566,000		1,749,000
Interest expense		366,000		306,000
Net income before taxes		1,200,000		1,443,000
Income taxes (30%)		360,000		432,900
Net income		840,000		1,010,100
Common dividends		340,000		505,050
Net income retained		500,000		505,050
Beginning retained earnings		1,220,000		714,950
Ending retained earnings	$	1,720,000	$	1,220,000

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio	2.4
Acid-test ratio	1.1
Average collection period	40	days
Average sale period	60	days
Return on assets	9.1	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.7
Price-earnings ratio	10

Problem 14-15 Part 1

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 $13,050,000.)

e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,214,950. There has been no change in common stock over the last two years.)

f. Is the company’s financial leverage positive or negative?

Problem 14-15 Part 2

2. You decide next to assess the company’s stock market performance. Assume that Lydex’s stock price at the end of this year is $90 per share and that at the end of last year it was $58. For both this year and last year, compute: (Round your "Percentage" answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

a. The earnings per share.

b. The dividend yield ratio.

c. The dividend payout ratio.

d. The price-earnings ratio.

e. The book value per share of common stock.

Problem 14-15 Part 3

3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute:

a. Working capital.

b. The current ratio. (Round your final answers to 2 decimal places.)

c. The acid-test ratio. (Round your final answers to 2 decimal places.)

d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,650,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)

e. The average sale period. (The inventory at the beginning of last year totaled $2,010,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)

f. The operating cycle. (Round your intermediate calculations and final answers to 2 decimal place.)

g. The total asset turnover. (The total assets at the beginning of last year totaled $14,590,000.) (Round your final answers to 2 decimal places.)

Answer 1

Answer to Part 1 - a & b

Answer to Part 1 - c

c. Computation of Gross Margin Percentage Gross Profit ((Sales- Cost of good sold)/Total sales) 100 This year Last year Sales Cost of goods sold Gross profit (refer to gross margin in the income statement) $ Gross Margin Percentage 1,33,80,000 1,00,35,000 1,58,40,000 $ 1,26,72,000 $ 31,68,000 $ 20.0% 33,45,000 25.0% (31,68,000/1,58,40,000) (33,45,000/1,33,80,000) 100 Calculation 100

Answer to Part 1 - d

d. Computation of Return on total assets Return on Total assets = (Net Income/Average Total Assets)* 100 Average Total assets Opening amount of total assets+ Closing amount of total asset This year Last year Opening amount of total assets Closing amount of total assets Total Average total assets Calculation Net Income Return on Total assets 1,47,20,000 $ 1,30,50,000 1,68,70,000 $ 3,15,90,000 $ 1,57,95,000 $ 1,47,20,000 2,77 70,000 1,38,85,000 (3,15,90,000/2) (2,77,70,000/2) 8,40,000 $ 10,10,100 7.3% (840,000/1,57,95,000) (10,10,100/1,38,85,000) 5.3% Calculation 100 100

Answer to Part 2 - a & b

Answer to Part 2 - c & d

Answer to Part 3 - a & b

Part 3 a. Computation of Working Capital Working Capital Current Assets Current Liabilities This vear Last year Current Assets Current Liabilities Working Capital Calculation 56,90,000 29,40,000 27,50,000 (73,90,000 39,90,000) (56,90,000 29,40,000) 73,90,000 $ 39,90,000 $ 34,00,000$ b. Computation of Current Ratio Current Ratio Current Assets/Current Liabilities This vear Last year Current Assets Current Liabilities Current Ratio Calculation 73,90,000 $ 39,90,000 $ 1.85 56,90,000 29,40,000 1.94 (73,90,000/39,90,000) (56,90,000/29,40,000)

Answer to Part 3 - c

Answer to Part 3 - d