Question

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	$	970,000	$	1,210,000
Marketable securities		0		300,000
Accounts receivable, net		2,740,000		1,840,000
Inventory		3,610,000		2,100,000
Prepaid expenses		260,000		200,000
Total current assets		7,580,000		5,650,000
Plant and equipment, net		9,540,000		9,060,000
Total assets	$	17,120,000	$	14,710,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,020,000	$	3,000,000
Note payable, 10%		3,680,000		3,080,000
Total liabilities		7,700,000		6,080,000
Stockholders' equity:
Common stock, $70 par value		7,000,000		7,000,000
Retained earnings		2,420,000		1,630,000
Total stockholders' equity		9,420,000		8,630,000
Total liabilities and stockholders' equity	$	17,120,000	$	14,710,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,870,000	$	13,680,000
Cost of goods sold		12,696,000		10,260,000
Gross margin		3,174,000		3,420,000
Selling and administrative expenses		1,106,000		1,608,000
Net operating income		2,068,000		1,812,000
Interest expense		368,000		308,000
Net income before taxes		1,700,000		1,504,000
Income taxes (30%)		510,000		451,200
Net income		1,190,000		1,052,800
Common dividends		400,000		526,400
Net income retained		790,000		526,400
Beginning retained earnings		1,630,000		1,103,600
Ending retained earnings	$	2,420,000	$	1,630,000

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	9.4	%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.7
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 $13,080,000.)

e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,103,600. There has been no change in common stock over the last two years.)

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

	This Year Last Year a. The times interest earned ratio b. The debt-to-equity ratio c. The gross margin percentage % % d. The return on total assets % % e. The return on equity % % f. Is the company’s financial leverage positive or negative?

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 $96 per share and that at the end of last year it was $64. 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.

	This Year Last Year 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

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 $1,680,000.) (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 $2,040,000.) (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 $14,620,000.) (Round your final answers to 2 decimal places.)

	This Year Last Year a. Working capital b. The current ratio c. The acid-test ratio d. The average collection period days days e. The average sale period days days f. The operating cycle days days g. The total asset turnover

Answer 1

a. Times Interest earned = EBIT / Interest Expense

This Year = 2,068,000 / 368000 = 5.62

Last Year = 1,812,000 / 308000 = 5.88

b. The debt-to-equity ratio = Total Liabilities / Total Equity

This Year = 7700000 / 9,420,000 = 0.817

Last Year = 6080000 / 8,630,000 = 0.705

c. The gross margin percentage = Gross Profit / Sales

This Year = 3174000 / 15,870,000 = 20%

Last Year = 3420000 / 13,680,000 = 25%

d. The return on total assets = Net Income / Avg.Total Assets

This Year = 1190000 / (17120000 + 14,710,000 ) / 2 = 1190000 / 15915000 = 7.48%

Last Year = 1,052,800 / (14,710,000 + 13,080,000 ) / 2 = 1052800 / 13895000 = 7.58%

e.The return on equity = Net Income / Avg.Total Equity

This Year = 1190000 / ( 8,630,000 + 9420000 ) / 2 = 1190000 / 9025000 = 13.19%

Last Year = 1,052,800 / (14,710,000 + 8,103,600)/2 = 1052800 / 11406800 = 9.23%

a. The earnings per share = Net Income / Outstanding shares

This Year = 1190000 / 100000 = 11.90

Last Year = 1,052,800 / 100000 = 10.53

b. The dividend yield ratio = Dividend per share / Market price

This Year = (400000 / 100000 ) / 96 = 4.17%

Last Year = ( 526,400 /100000 ) / 64 = 8.23%

c. The dividend payout ratio = Dividend per share / Earnings per share

This Year = 4 / 11.90 = 33.61%

Last Year = 5.26 / 10.53 = 49.95%

d. The price-earnings ratio = Market Price / EPS

This Year = 96 / 11.90 = 8.07

Last Year = 64 / 10.53 = 6.08

e. The book value per share of common stock = Total stockholders' equity / Outstanding shares

This Year = 9,420,000 / 100000 = 94.20

Last Year = 8,630,000 / 100000 = 86.30

a. Working capital = Current Assets - Current Liabilities

This Year = 7,580,000 - 4,020,000 = 3560000

Last Year = 5,650,000 - 3000000 = 2650000

b. The current ratio = Current Assets / Current Liabilities

This Year = 7,580,000 / 4,020,000 = 1.89

Last Year = 5,650,000 / 3000000 = 1.88

c. The acid-test ratio = Quick Assets / Current Liabilities

This Year = 3710000 / 4,020,000 = 0.923

Last Year = 3350000 / 3000000 = 1.12

d. The average collection period = 365/ ( sales / avg. receivables)

This Year = 365 / ( 15870000 / ( 2,740,000 + 1840000 ) / 2 ) = 365 / (15870000 / 2290000 ) = 365 / 6.93 = 52.67 days

Last Year = 365 / ( 13680000 / ( 1,680,000 + 1840000 ) / 2 ) = 365 / (13680000 / 1760000 ) = 365 / 7.77 = 46.98 days

e. The average sale period = Cost of goods sold / Avg.Inventory

This Year = 365 / ( 12,696,000 / ( 3,610,000 + 2100000 ) / 2 ) = 365 / (12,696,000 / 2855000 ) = 365 / 4.45 = 82.02 Days

Last Year = 365 / ( 10,260,000 / ( 2100000 + 2,040,000 ) / 2 ) = 365 / (10,260,000 / 2070000 ) = 365 / 4.96 = 73.59 days

f. The operating cycle = average collection period + average sale period

This Year = 52.67 days + 82.02 Days = 134.69 Days

Last Year = 46.98 days + 73.59 days = 120.57 Days

g. The total asset turnover = Sales / Avg. Total Assets

This Year = 15,870,000 / ( 17,120,000 + 14710000 ) / 2 = 15,870,000 / 15915000 = 0.997

Last Year = 13,680,000 / (14710000 + 13,080,000 ) / 2 = 13,680,000 / 13895000 = 0.985