Question

[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: Last Year 0 Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 890,000 Marketable securities Accounts receivable, net 2,420,000 Inventory 3,530,000 Prepaid expenses 240,000 Total current assets 7,080,000 Plant and equipment, net 9,380,000 Total assets $16,460,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,940,000 Note payable, 10% 3,620,000 Total liabilities 7,560,000 Stockholders' equity: Common stock, $70 par value 7,000,000 Retained earnings 1,900,000 Total stockholders' equity 8,900,000 Total liabilities and stockholders' equity $16,460,000 $ 1,130,000 300,000 1,520,000 2,300,000 180,000 5,430,000 8,980,000 $14,410,000 $ 2,840,000 3,020,000 5,860,000 7,000,000 1,550,000 8,550,000 $14,410,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,790,000 $ 12,880,000 Cost of goods sold 12,632,000 9,660,000 Gross margin 3,158,000 3,220,000 Selling and administrative expenses 1,796,000 1,576,000 Net operating income 1,362,000 1,644,000 Interest expense 362,000 302,000 Net income before taxes 1,000,000 1,342,000 Income taxes (30%) 300,000 402,600 Net income 700,000 939, 400 Common dividends 350,000 469, 700 Net income retained 350,000 469, 700 Beginning retained earnings 1,550,000 1,080,300 Ending retained earnings $ 1,900,000 $ 1,550,000

Answer 1

| Answers a) Time Interest earned valio - Nel- operating income/Interest- ea penje This year Time Interest earned ratio = $1362.020/362.000 :: This Year Time Interest earned ratio. = $3.76 Times Last year Time Intenet earned valio = $1.6414000/$302.000 .. Last year Time Interest earned ratio = $5.44 Times b) Debt to equily ratio = Total Debt / Total equity This year Debt to equila sato - $7560,000/$9.900,000 ..Taist Year Deble to equuity ratio 0.85 Times Last Yeay Debt to equity ratio $5,860,000 $.9550,000 :: Last year Del to equily ratio : 0.69 Times c) Gross Margin percentage = Giroso Mazzin sales x 100 This year Giroso Margin percentage - $3158,000 $15,790000100 :This year Gross Margin percentage = 20% Last year Gross Hargin percentage = 63.220.000 12,880.00 .. Last year Gross Margin perceulāge = 25% d) Return on Total Assels = Net opesaling Assets/ Average Tcal Art This Year Average Total Assels = $16,460000 + $14410,000)/2 $15,435000 This year Rebern on Total Assels = $1362,000/$15,435,000 x100 : This Year Return on Total Assels = 4.82% Last year Average Total Assels = $14.410.000 + $13,000,000)), = $13,705.000 Last year Relarnon Total Assels = $1,644,000/12,705000 X100 .: Last year Return on Total Ausets = 12.00% Return on equity = Net Income) Average Total Equity This year Average Total exceily = ($ 8900,000 + 5550,000)/2 This year Rotern on equity = $700,000/$ 8725.000 x100 :. This year Return on equily = 8.02% Return on eart $8,725,000*350,000)/2 Last year Average Total equity-68,550000 +$3080300)/2 $ 8,315.150 Last Year Return on equily = $939.400/8315150 X100? .. Last year Return on easily = 11.30 % +) The company's financial leverage is Negative, because The Return on equily is Lessthan Return on Total Assets