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

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

Sales (all on account) . . . . . . . . . . . . .	This Year $15,750,000			Last Year $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 . ... . . . ... . . . . . . . ...... .9.5%

Debt-to-equity ratio . . . . . . . . . . . . . . . . . . . . . .0.65

Times interest earned ratio . ...... . . . . . . . . . .5.7

Price-earnings ratio ..... . ... . ...... . . ... .10

1. You decide first to assess the company's performance in terms of debt management and profit ability. Compute the following for both this year and last year:

a.The times interest eruned 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 begimring of last year totaled $9,048,000.

There has been no change incommon stock over the last two years.)

f. Is the company's financial leverage positive or negative? Explain.

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:

a.The earnings per share.

b. The dividend yield ratio.

c.The dividend payout ratio.

d. The price-earnings ratio. How do investors regard Lydex Company as compared to other companies in the industry? Explain.

e. The book value per share of common stock. Does the difference between market value per share and book value per share suggest that the stock at its cunent price is a bargain? Explain.

3. You decide, finally, to assess the company's liquidity and asset management. For both this year and last year, compute:

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 atthe beginning oflast year totaled $14,500,000.)

4. Prepare a brief memo that summaiizes how Lydex is perfo1ming relative to its competitors.

Refer to the financial statement data for Lydex Company given in Problem 15-15.

Required:

For both this year and last year:

1. Present the balance sheet incommon-size format.

2. Present the income statement in common-size format down through net income.

3. Comment on the results of your analysis.

Sales trend . . . . . . ' ...... . . ... . 128.0 115.0 1Q0.0

Current ratio . . . . . . . . . . . ... . ... 2.5 2.3 2.2

Acid-test ratio ..' . ..... . . . ..... 0.8 0.9 1.1

Accounts receivable turnover . . . ... 9.4 10.6 12.5

Inventory turnover . ... . . . . . . . . . . 6.5 7.2 8.0

Dividend yield . . . ........ . ... . ' 7.1% 6.5% 5.8%

Dividend payout ratio ............ 40% 50% 60%

Return on total assets . . . .... . ... 12.5% 11.0% 9.5%

Return on equity . . ..... . . ... ... 14.0% 10.0% 7.8%

Dividends paid per share* . . . . . . .. $1.50 $1.50 $1.50

*There have been no changes in common stock outstanding over the three-year period.