Question
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
| 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 companys financial statements, including comparing Lydexs performance to its major competitors. The companys financial statements for the last two years are as follows |
| Lydex Company Comparative Income Statement and Reconciliation | ||||
| This Year | Last Year | |||
| Sales (all on account) | $ | 15,900,000 | $ | 13,980,000 |
| Cost of goods sold | 12,720,000 | 10,485,000 | ||
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| Gross margin | 3,180,000 | 3,495,000 | ||
| Selling and administrative expenses | 1,410,000 | 1,620,000 | ||
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| Net operating income | 1,770,000 | 1,875,000 | ||
| Interest expense | 370,000 | 310,000 | ||
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| Net income before taxes | 1,400,000 | 1,565,000 | ||
| Income taxes (30%) | 420,000 | 469,500 | ||
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| Net income | 980,000 | 1,095,500 | ||
| Common dividends | 400,000 | 547,750 | ||
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| Net income retained | 580,000 | 547,750 | ||
| Beginning retained earnings | 1,540,000 | 992,250 | ||
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| Ending retained earnings | $ | 2,120,000 | $ | 1,540,000 |
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| To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Companys industry: |
| Current ratio | 2.3 | |
| Acid-test ratio | 1.1 | |
| Average collection period | 32 | days |
| Average sale period | 60 | days |
| Return on assets | 9.7 | % |
| Debt-to-equity ratio | .65 | |
| Times interest earned ratio | 5.7 | |
| Price-earnings ratio | 10 | |
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Required information
| Required: |
| 1. | You decide first to assess the companys 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 $13,110,000.) |
| e. | The return on equity. (Stockholders equity at the beginning of last year totaled $8,492,250. There has been no change in common stock over the last two years.) |
| f. | Is the companys financial leverage positive or negative? |
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Intermediate Accounting
Authors: J. David Spiceland, James Sepe, Mark Nelson
6th edition
978-0077400163
