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 | $ | 980,000 | $ | 1,220,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,780,000 | 1,880,000 | ||
Inventory | 3,620,000 | 2,200,000 | ||
Prepaid expenses | 260,000 | 200,000 | ||
Total current assets | 7,640,000 | 5,800,000 | ||
Plant and equipment, net | 9,560,000 | 9,070,000 | ||
Total assets | $ | 17,200,000 | $ | 14,870,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 4,030,000 | $ | 3,020,000 |
Note payable, 10% | 3,680,000 | 3,080,000 | ||
Total liabilities | 7,710,000 | 6,100,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,990,000 | 1,270,000 | ||
Total stockholders' equity | 9,490,000 | 8,770,000 | ||
Total liabilities and stockholders' equity | $ | 17,200,000 | $ | 14,870,000 |
Lydex Company Comparative Income Statement and Reconciliation |
||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,880,000 | $ | 13,780,000 |
Cost of goods sold | 12,704,000 | 10,335,000 | ||
Gross margin | 3,176,000 | 3,445,000 | ||
Selling and administrative expenses | 1,208,000 | 1,612,000 | ||
Net operating income | 1,968,000 | 1,833,000 | ||
Interest expense | 368,000 | 308,000 | ||
Net income before taxes | 1,600,000 | 1,525,000 | ||
Income taxes (30%) | 480,000 | 457,500 | ||
Net income | 1,120,000 | 1,067,500 | ||
Common dividends | 400,000 | 533,750 | ||
Net income retained | 720,000 | 533,750 | ||
Beginning retained earnings | 1,270,000 | 736,250 | ||
Ending retained earnings | $ | 1,990,000 | $ | 1,270,000 |
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 | 32 | days |
Average sale period | 60 | days |
Return on assets | 9.5 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.8 | |
Price-earnings ratio | 10 | |
Problem 15-15 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 $13,090,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,236,250. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
(1)
times interest earned ratio = net operating income/interest expense
for this year,
= $1968000/368000 = 5.35 times
for last year,
= $1833000/$308000 = 5.95 times
(2)
debt to equity ratio = total liabilities/total equity
for this year,
= $7710000/$9490000 = 0.81
for last year,
= $6100000/$8770000 = 0.70
(3)
the gross margin percentage = gross margin/sales
for this year,
= $3176000/$15880000 = 20%
for last year,
= $3445000/$13780000 = 25%
(4)
return on total assets = net operating income/average total assets
for this year,
= $1968000/{($17200000 + $14870000)/2} = 12.3%
for last year,
= $$1833000/{($14870000 + $13090000)/2} = 13.1%
You have just been hired as a financial analyst for Lydex Company, a manufacturer of safety...
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 $ 980,000 $ 1,220,000 Marketable securities 0 300,000 Accounts receivable, net 2,780,000 1,880,000 Inventory 3,620,000...
Required information [The following information applies to the questions displayed below.] 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 $ 980,000 2,780,000 3,620,000 260,000 7,640,000 9,560, 000...
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 $ 1,000,000 $ 1,240,000 Marketable securities 0 300,000 Accounts receivable, net 2,860,000 1,960,000 Inventory 3,640,000...
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: To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Problem 14-15 Part 1 Required: 1. You...
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 $ 920,000 $ 1,160,000 Marketable securities 0 300,000 Accounts receivable, net 2,540,000 1,640,000 Inventory 3,560,000...
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 $ 1,040,000 $ 1,280,000 Marketable securities 0 300,000 Accounts receivable, net 3,020,000 2,120,000 Inventory 3,680,000...
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 $ 880,000 $ 1,120,000 Marketable securities 0 300,000 Accounts receivable, net 2,380,000 1,480,000 Inventory 3,520,000...
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 $ 1,000,000 $ 1,240,000 Marketable securities 0 300,000 Accounts receivable, net 2,860,000 1,960,000 Inventory 3,640,000...
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 $ 1,030,000 $ 1,270,000 Marketable securities 0 300,000 Accounts receivable, net 2,980,000 2,080,000 Inventory 3,670,000...
ou 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 $ 960,000 $ 1,260,000 Marketable securities 0 300,000 Accounts receivable, net 2,700,000 1,800,000 Inventory 3,900,000...