Problem - 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
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Last Year
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Assets
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|
|
Current assets:
|
|
|
Cash
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$980,000
|
$1,220,000
|
Marketable securities
|
0
|
300,000
|
Accounts receivable, net
|
2,780,000
|
1,880,000
|
Inventory
|
3,620,000
|
2,200,000
|
Prepaid expenses
|
260,000
|
200,000
|
Total current assets
|
7,640,000
|
5,800,000
|
Plant and equipment, net
|
9,560,000
|
9,070,000
|
Total assets
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$17,200,000
|
$14,870,000
|
Liabilities and Stockholders' Equity
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|
|
Liabilities:
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|
|
Current liabilities
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$4,030,000
|
$3,020,000
|
Note payable, 10%
|
3,680,000
|
3,080,000
|
Total liabilities
|
7,710,000
|
6,100,000
|
Stockholders' equity:
|
|
|
Common stock, $75 par value
|
7,500,000
|
7,500,000
|
Retained earnings
|
1,990,000
|
1,270,000
|
Total stockholders' equity
|
9,490,000
|
8,770,000
|
Total liabilities and stockholders' equity
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$17,200,000
|
$14,870,000
|
Lydex Company Comparative Income Statement and Reconciliation
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|
This Year
|
Last Year
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Sales (all on account)
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$15,880,000
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$13,780,000
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Cost of goods sold
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12,704,000
|
10,335,000
|
Gross margin
|
3,176,000
|
3,445,000
|
Selling and administrative expenses
|
1,208,000
|
1,612,000
|
Net operating income
|
1,968,000
|
1,833,000
|
Interest expense
|
368,000
|
308,000
|
Net income before taxes
|
1,600,000
|
1,525,000
|
Income taxes (30%)
|
480,000
|
457,500
|
Net income
|
1,120,000
|
1,067,500
|
Common dividends
|
400,000
|
533,750
|
Net income retained
|
720,000
|
533,750
|
Beginning retained earnings
|
1,270,000
|
736,250
|
Ending retained earnings
|
$1,990,000
|
$1,270,000
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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
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Acid-test ratio
|
1.1
|
Average collection period
|
32 days
|
Average sale period
|
60 days
|
Return on assets
|
9.5 %
|
Debt-to-equity ratio
|
.68
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Times interest earned ratio
|
5.8
|
Price-earnings ratio
|
10
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Required: 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 $13,090,000.)
e. The return on equity. (Stockholders' equity at the beginning of last year totaled $8,236,250. There has been no change in common stock over the last two years.)
f. Is the company's financial leverage positive or negative?