Question

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 $ 1,040,000 0 3,020,000 3,680,000 270,000 8,010,000 9,680,000 $ 17,690,000 $ 1,280,000 300,000 2,120,000 2,300,000 210,000 6,210,000 9,130,000 $15, 340,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% Total liabilities Stockholders' equity: Common stock, $75 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 4,090,000 3,720,000 7,810,000 $3,140,000 3, 120,000 6,260,000 7,500,000 2,380,000 9,880,000 $ 17,690,000 7,500,000 1,580,000 9,080,000 $15, 340,000

Answer 1

(1)

times interest earned ratio = net operations income/interest expenses

for this year,

= $1972000/$372000 = 5.30 times

for last year,

= $1959000/$312000 = 6.28 times

(2)

the debt to equity ratio = total liabilities/total stockholders equity

for this year,

= $7810000/$9880000 = 0.79

for last year,

= $6260000/$9080000 = 0.69

(3)

the gross margin percentage = gross margin/sales

for this year,

= $3188000/$15940000 = 20%

for last year,

= $3595000/$14380000 = 25%

(4)

return on total assets (ROTA) = earning before interest and taxes/average total assets

for this year

= $1972000/{($17690000 + $15340000)/2}

= $1972000/$16515000 = 11.9%

for last year

= $1959000/{($15340000 + $13150000)/2}

= $1959000/$14245000 = 13.8%