Required information
Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6]
[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 | |||
Assets | ||||
Current assets: | ||||
Cash | $ | 990,000 | $ | 1,230,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,820,000 | 1,920,000 | ||
Inventory | 3,630,000 | 2,300,000 | ||
Prepaid expenses | 260,000 | 200,000 | ||
Total current assets | 7,700,000 | 5,950,000 | ||
Plant and equipment, net | 9,580,000 | 9,080,000 | ||
Total assets | $ | 17,280,000 | $ | 15,030,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 4,040,000 | $ | 3,040,000 |
Note payable, 10% | 3,680,000 | 3,080,000 | ||
Total liabilities | 7,720,000 | 6,120,000 | ||
Stockholders' equity: | ||||
Common stock, $70 par value | 7,000,000 | 7,000,000 | ||
Retained earnings | 2,560,000 | 1,910,000 | ||
Total stockholders' equity | 9,560,000 | 8,910,000 | ||
Total liabilities and stockholders' equity | $ | 17,280,000 | $ | 15,030,000 |
Lydex Company Comparative Income Statement and Reconciliation |
||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,890,000 | $ | 13,880,000 |
Cost of goods sold | 12,712,000 | 10,410,000 | ||
Gross margin | 3,178,000 | 3,470,000 | ||
Selling and administrative expenses | 1,210,000 | 1,616,000 | ||
Net operating income | 1,968,000 | 1,854,000 | ||
Interest expense | 368,000 | 308,000 | ||
Net income before taxes | 1,600,000 | 1,546,000 | ||
Income taxes (30%) | 480,000 | 463,800 | ||
Net income | 1,120,000 | 1,082,200 | ||
Common dividends | 470,000 | 541,100 | ||
Net income retained | 650,000 | 541,100 | ||
Beginning retained earnings | 1,910,000 | 1,368,900 | ||
Ending retained earnings | $ | 2,560,000 | $ | 1,910,000 |
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 | 9.6 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
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 $13,100,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,368,900. 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 operations income/interest expenses
for this year,
= $1968000/$368000 = 5.35 times
for last year,
= $1854000/$308000 = 6.02 times
(2)
the debt to equity ratio = total liabilities/total stockholders equity
for this year,
= $7720000/$9560000 = 0.81
for last year,
= $6120000/$8910000 = 0.69
(3)
the gross margin percentage = gross margin/sales
for this year,
= $3178000/$15890000 = 20%
for last year,
= $3470000/$13880000 = 25%
(4)
return on total assets (ROTA) = earning before interest and taxes/average total assets
for this year
= $1968000/{($17280000 + $15030000)/2}
= $1968000/$16155000 = 12.2%
for last year
= $1854000/{($15030000 + $13100000)/2}
= $1854000/$14065000 = 13.2%
(5)
return on equity = net income/average shareholders equity
for this year
= $1120000/{($9560000 + $8910000)/2}
= $1120000/$9235000 = 12.1%
for last year
= $1082200/{($8910000 + $8368900)/2}
= $1082200/$8639450 = 12.5%
Required information Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6] [The following information applies...
Required information Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6] [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...
Required information Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6] [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...
Required information Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6] [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...
Problem 14-15 Comprehensive Ratio Analysis [LO14-2, LO14-3, LO14-4, LO14-5, LO14-6] [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...
Problem 14-15 Comprehensive Ratio Analysis (LO14-2, LO14-3, LO14-4, LO14-5, LO14-6) [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 Lydex Company Comparative Balance Sheet This Year...
Please answer part 1, 2 and 3. Required information Problem 15-15 Comprehensive Ratio Analysis [L015-2, Lo15-3, LO15-4, Lo15-5, LO15-6) 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:...
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 Assets Current assets: Cash $ 930,000 $ 1,170,000...
PLEASE HELP! Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6] 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 $ 900,000 $...
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 Assets Current assets: Cash $ 930,000 $ 1,170,000...
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 Assets Current assets: Cash $ 970,000 $ 1,210,000...