In: Accounting
Q. 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 | $ | 870,000 | $ | 1,110,000 |
Marketable securities | 0 | 300,000 | ||
Accounts receivable, net | 2,340,000 | 1,440,000 | ||
Inventory | 3,510,000 | 2,100,000 | ||
Prepaid expenses | 240,000 | 180,000 | ||
Total current assets | 6,960,000 | 5,130,000 | ||
Plant and equipment, net | 9,340,000 | 8,960,000 | ||
Total assets | $ | 16,300,000 | $ | 14,090,000 |
Liabilities and Stockholders' Equity | ||||
Liabilities: | ||||
Current liabilities | $ | 3,920,000 | $ | 2,800,000 |
Note payable, 10% | 3,600,000 | 3,000,000 | ||
Total liabilities | 7,520,000 | 5,800,000 | ||
Stockholders' equity: | ||||
Common stock, $70 par value | 7,000,000 | 7,000,000 | ||
Retained earnings | 1,780,000 | 1,290,000 | ||
Total stockholders' equity | 8,780,000 | 8,290,000 | ||
Total liabilities and stockholders' equity | $ | 16,300,000 | $ | 14,090,000 |
Lydex Company Comparative Income Statement and Reconciliation |
||||
This Year | Last Year | |||
Sales (all on account) | $ | 15,770,000 | $ | 12,680,000 |
Cost of goods sold | 12,616,000 | 9,510,000 | ||
Gross margin | 3,154,000 | 3,170,000 | ||
Selling and administrative expenses | 1,594,000 | 1,568,000 | ||
Net operating income | 1,560,000 | 1,602,000 | ||
Interest expense | 360,000 | 300,000 | ||
Net income before taxes | 1,200,000 | 1,302,000 | ||
Income taxes (30%) | 360,000 | 390,600 | ||
Net income | 840,000 | 911,400 | ||
Common dividends | 350,000 | 455,700 | ||
Net income retained | 490,000 | 455,700 | ||
Beginning retained earnings | 1,290,000 | 834,300 | ||
Ending retained earnings | $ | 1,780,000 | $ | 1,290,000 |
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 | 1.0 | |
Average collection period | 30 | days |
Average sale period | 60 | days |
Return on assets | 8.3 | % |
Debt-to-equity ratio | 0.7 | |
Times interest earned ratio | 5.9 | |
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 $12,980,000.)
e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $7,834,300. There has been no change in common stock over the last two years.)
f. Is the company’s financial leverage positive or negative?
Ratios | Formula | This year | Last year | |
a | Times interest earned | Operating income(EBIT)/interest expense | 4.33 | 5.34 |
($15,60,000/$3,60,000) | ($16,02,000/$300,000) | |||
b | Debt -equity ratio | Total debt/Total shareholders equity | 0.86 | 0.70 |
($75,20,000/$87,80,000) | ($5,800,000/$8,290,000) | |||
c | Gross Margin % | Gross profit/net sales revenue | 20.0% | 25.0% |
($31,54,000/$15,770,000) | ($3,170,000/$12,680,000) | |||
d | Return on Total assets(ROA) | Net income/avg Total assets | 5.5% | 6.7% |
($840,000/$15,195,000) | ($911,400/$13,535,000) | |||
*Avg Total asset | $ 15,195,000.00 | $ 13,535,000.00 | ||
($16,300,000+$14,090,000)/2 | ($14,090,000+$12,980,000)/2 | |||
e | Return on Equity | Net income/avg shareholder's equity | 9.8% | 11.3% |
*Avg shareholder's equity | $ 8,535,000.00 | $ 8,062,150.00 | ||
($8,780,000+$8,290,000)/2 | ($8,290,000+$7,834,300)/2 | |||
f | Degree of Financial Leverage | Operating income(EBIT)/Profit before tax(EBT) | 1.30 | 1.23 |
($1,560,000/$1,200,000) | ($1,602,000/$1,302,000) | |||
Please do upvote if you found the answer useful. |
Feel free reach in the comment section in case of any clarification or queries. |