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 | 2,100,000 | ||
Prepaid expenses | 250,000 | 190,000 | ||
Total current assets | 7,270,000 | 5,390,000 | ||
Plant and equipment, net | 9,440,000 | 9,010,000 | ||
Total assets | $ | 16,710,000 | $ | 14,400,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,970,000 | $ | 2,900,000 |
Note payable, 10% | 3,640,000 | 3,040,000 | ||
Total liabilities | 7,610,000 | 5,940,000 | ||
Stockholders' equity: | ||||
Common stock, $75 par value | 7,500,000 | 7,500,000 | ||
Retained earnings | 1,600,000 | 960,000 | ||
Total stockholders' equity | 9,100,000 | 8,460,000 | ||
Total liabilities and stockholders' equity | $ | 16,710,000 | $ | 14,400,000 |
Lydex Company Comparative Income Statement and Reconciliation |
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This Year | Last Year | |||
Sales (all on account) | $ | 15,820,000 | $ | 13,180,000 |
Cost of goods sold | 12,656,000 | 9,885,000 | ||
Gross margin | 3,164,000 | 3,295,000 | ||
Selling and administrative expenses | 1,400,000 | 1,588,000 | ||
Net operating income | 1,764,000 | 1,707,000 | ||
Interest expense | 364,000 | 304,000 | ||
Net income before taxes | 1,400,000 | 1,403,000 | ||
Income taxes (30%) | 420,000 | 420,900 | ||
Net income | 980,000 | 982,100 | ||
Common dividends | 340,000 | 491,050 | ||
Net income retained | 640,000 | 491,050 | ||
Beginning retained earnings | 960,000 | 468,950 | ||
Ending retained earnings | $ | 1,600,000 | $ | 960,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
Current ratio | 2.3 | |
Acid-test ratio | 1.1 | |
Average collection period | 40 | days |
Average sale period | 60 | days |
Return on assets | 8.8 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.8 | |
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 $13,030,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,968,950. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
No. | Ratio | Computation | This Year | Last Year |
a. | Times Interest Earned Ratio | Net Operating Income / Interest Expense | 4.85 | 5.62 |
b. | Debt to Equity Ratio | Total Liabilities / Total Stockholders Equity | 0.84 | 0.70 |
c. | Gross Margin Percentage | Gross Margin / Sales * 100 | 20 % | 25 % |
d. | Return on Total Assets | Net Income / Average Total Assets | 6.3 % | 7.2 % |
e. | Return on Equity | Net Income / Average Stockholders Equity | 11.2 % | 12 % |
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 $ 920,000 0 2,540,000 3,560,000 250,000 7,270,000 9,440,000 $ 16,710,000 $ 1,160,000 300,000 1,640,000 2,100,000 190,000 5,390,000 9,010,000 $14,400,000...
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 $ 980,000 $ 1,220,000 Marketable securities 0 300,000 Accounts receivable, net 2,780,000 1,880,000 Inventory 3,620,000...
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 $ 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 $ 1,000,000 $ 1,240,000 Marketable securities 0 300,000 Accounts receivable, net 2,860,000 1,960,000 Inventory 3,640,000...
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...
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 $ 1,040,000 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...