Question

[The following information applies to the questions displayed below.] 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 $ 940,000 $ 1,180,000 Marketable securities 0 300,000 Accounts receivable, net 2,620,000 1,720,000 Inventory 3,580,000 2,300,000 Prepaid expenses 250,000 190,000 Total current assets 7,390,000 5,690,000 Plant and equipment, net 9,480,000 9,030,000 Total assets $ 16,870,000 $ 14,720,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,990,000 $ 2,940,000 Note payable, 10% 3,660,000 3,060,000 Total liabilities 7,650,000 6,000,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 1,720,000 1,220,000 Total stockholders' equity 9,220,000 8,720,000 Total liabilities and stockholders' equity $ 16,870,000 $ 14,720,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,840,000 $ 13,380,000 Cost of goods sold 12,672,000 10,035,000 Gross margin 3,168,000 3,345,000 Selling and administrative expenses 1,602,000 1,596,000 Net operating income 1,566,000 1,749,000 Interest expense 366,000 306,000 Net income before taxes 1,200,000 1,443,000 Income taxes (30%) 360,000 432,900 Net income 840,000 1,010,100 Common dividends 340,000 505,050 Net income retained 500,000 505,050 Beginning retained earnings 1,220,000 714,950 Ending retained earnings $ 1,720,000 $ 1,220,000 To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry: Current ratio 2.4 Acid-test ratio 1.1 Average collection period 40 days Average sale period 60 days Return on assets 9.1 % Debt-to-equity ratio .69 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 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 $13,050,000.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,214,950. 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 $90 per share and that at the end of last year it was $58. For both this year and last year, compute: (Round your intermediate calculations and final answers to 2 decimal places. For percentages 0.1234 should be considered as 12.34%.) 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 "days" intermediate calculations and final answers to 1 decimal place. Round all other intermediate calculations and final answers 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 $1,650,000.) e. The average sale period. (The inventory at the beginning of last year totaled $2,010,000.) f. The operating cycle. g. The total asset turnover. (The total assets at the beginning of last year totaled $13,050,000.)

Answer 1

1. Company’s performance in terms of debt management and profitability
a. The times interest earned ratio
EBIT /Interest expense	1566000/366000=	1749000/306000=
(Times)	4	6
b. The debt-to-equity ratio
Total debt/Total equity	7650000/9220000=	6000000/8720000=
	0.83	0.69
c. The gross margin percentage
Gross Margin/Sales	3168000/15840000=	3345000/13380000=
	20%	25%
d. The return on total assets
Net Income/Av.assets	840000/((14720000+16870000)/2)=	1010100/((13050000+14720000)/2)=
Av.assets= (Beg.+End. assets)/2	5.32%	7.27%
e. The return on equity
Net Income/Av. Stock holders' equity	840000/((8720000+9220000)/2)=	1010100/((8214950+8720000)/2)=
	9.36%	11.93%
f. Is the company’s financial leverage positive or negative?
	The firm has become more levered this year . More debt this Year
2. Company’s stock market performance
Stock price at end of the year	90	58
a. The earnings per share
Net Income/No.of shares o/s	840000/100000=	1010100/100000=
	8.40	10.10
b. The dividend yield ratio
$ dividend /Stock price	(340000/100000)/90=	(505050/100000)/58
	3.78%	8.71%
c. The dividend payout ratio
Dividends/Net Income	340000/840000=	505050/1010100=
	40.48%	50%
d. The price-earnings ratio
Stock price/EPS	90/8.40=	58/10.10=
	10.71	5.74
e. The book value per share of common stock
Total Stockholders' Equity/No.of shares	9220000/100000=	8720000/100000=
	92.2	87.2

3..Lyndex's liquidity and asset management
a. Working capital
Current Assets-Current Liabilities
	7390000-3990000=	5690000-2940000=
	3400000	2750000
b. The current ratio
Current assets/ Current Liabilities	7390000/3990000=	5690000/2940000=
	1.85	1.94
c. The acid-test ratio
(Current assets-Inventory)/ Current Liabilities
	(7390000-3580000)/3990000=	(5690000-2300000)/2940000=
	0.95	1.15
d. The average collection period
365/A/cs. Receivables Turnover	365/(15840000/((1720000+2620000)/2)=	365/(13380000/((1650000+1720000)/2)=
	50	46
e. The average sale period
365/Inventory Turnover Ratio	365/(12672000/((2300000+3580000)/2)=	365/(10035000/((2010000+2300000)/2)=
	85	78
f. The operating cycle.
Operating Cycle = Days' Sales of Inventory + Days Sales Outstanding	50+85=	46+78=
	135	124
g. The total asset turnover
Sales/Av.Assets	15840000/((16870000+14720000)/2)=	13380000/((13050000+13380000)/2)=
	1.00	1.01

Comparison of Ratios	Industry	Lyndex
Current ratio	2.4	1.85	Less than Industry
Acid-test ratio	1.1	0.95	Less than Industry
Average collection period	40 days	50 days	Slackened collection of receivables compared to Industry
Average sale period	60 days	85 days	Slow conversion of inventory to sales compared to Industry
Return on assets	9.10%	5.32%	Lesser return(Net Income) on assets compared to industry
Debt-to-equity ratio	0.69	0.83	Lyndex shows more debt financing
Times interest earned ratio	5.7	4.3	Interest expense coverage is less than industry average
Price-earnings ratio	10.1	10.71	Market price of stock compared to Earnings is slightly more for Lyndex