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 960,000 1,260,000
marketable securities 0 300,000
accounts receivable, net 2,700,000 1,800,000
inventory 3,900,000 2,400,000
prepaid expenses 240,000 180,000
total current assets 7,800,000 5,940,000
plant and equipment, net 9,300,000 8,940,000
total assets 17,100,000 14,880,000
liabilities and stockholders' equity
liabilities:
current liabilities 3,900,000 2,760,000
note payable, 10% 3,600,000 3,000,000
total liabilities 7,500,000 5,760,000
stockholders' equity:
common stock, $78 par value 7,800,000 7,800,000
retained earnings 1,800,000 1,320,000
total stockholders' equity 9,600,000 9,120,000
total liabilities and stockholders' equity 17,100,000 14,880,000
lydex company
comparative income statement and reconciliation
this year last year
sales (all on account) 15,750,000 12,480,000
cost of goods sold 12,600,000 9,900,000
gross margin 3,150,000 2,580,000
selling and administrative expenses 1,590,000 1,560,000
net operating income 1,560,000 1,020,000
interest expense 360,000 300,000
net income before taxes 1,200,000 720,000
income taxes (30%) 360,000 216,000
net income 840,000 504,000
common dividends 360,000 252,000
net income retained 480,000 252,000
beginning retained earnings 1,320,000 1,068,000
ending retained earnings 1,800,000 1,320,000
to begin your assigment 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 1.2
average collection period 30 days
average sale period 60 days
return on assets 9.50%
debt-to-equity ratio 0.65
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 intermediate calculations and final percentage answers to 1 decimal place. i. e., 0.123 should be considered as 12.3%. round the rest of the intermediate calculations and final 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 $12,960,000.)
e. the return on equity. (stockholders’ equity at the beginning of last year totaled $9,048,000. there has been no change in common stock over the last two years.)
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 $72 per share and that at the end of last year it was $40. for both this year and last year, compute: (round your intermediate calculations and final percentage answers to 1 decimal place. i. e., 0.123 should be considered as 12.3%. round the rest of the intermediate calculations 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.
3. you decide, finally, to assess the company’s liquidity and asset management. for both this year and last year, compute: (use 365 days in a year. round your intermediate calculations and final answer to 2 decimal places.)
a. working capital.
b. the current ratio.
c. the acid-test ratio.
d. the average collection period. (the accounts receivable at the beginning of last year totaled $1,560,000.)
e. the average sale period. (the inventory at the beginning of last year totaled $1,920,000.)
f. the operating cycle.
g. the total asset turnover. (the total assets at the beginning of last year totaled $12,960,000.)