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:
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

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:
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? 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 current 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 at the beginning of last year totaled $ 14,500,000.)
4. Prepare a brief memo that summarizes how Lydex is performing relative to itscompetitors.

Transcribed Image Text:

Lydex Company Comparative Balance Sheet This Year ear Assets Current assets: Marketable securities . Accounts receivable, net .a... Inventorye3,900,000 2,400,000 Prepaid expenses.. 300,000 2,700,000 1800,000 180,000 7,800,000 5,94,00 240,000 Total current assets . Plant and equipment, net .. 9,300,000 8,940,000 Total assets.aan.$17,100,000 $14,880,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% 3,900,000 2,760,000 3600000 3,000,000 Stockholders' equity: 7800,000 7,800,000 Common stock, $78 par value.. .7 Retained eanings . .. 1,800,000 ,320,000 9,120,000 Total liabilities and stockholders' equity..$17.100.000 $14.880,000 Total stockholders' equity 9,600,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Cost of goods sold . . 12,600,000 9,900,000 Gross margin...3,150,000 2,580,000 Selling and administrative expenses1,590,000 1,560,000 1,560,000 1,020,000 300,000 720,000 216,000 504,000 252,000 252,000 1.320,000 1,068,000 Net operating income . Interest expense 360,000 Net income before taxes1200,000 360,000 840,000 360,000 480,000 Income taxes (30%) Net income retained . Ending retained earnings.1,800,000 $ 1320,000