perform a comprehensive analysis of the company’s financial statements

Your boss has asked you to perform a comprehensive analysis of the company’s financial statements. 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 assignment 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 0.7
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 “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 $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 “Percentage” answers to 1 decimal place and other intermediate and final answers to 2 decimal places.)

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:

a. Working capital.

b. The current ratio. (Round your final answers to 2 decimal places.)

c. The acid-test ratio. (Round your final answers to 2 decimal places.)

d. The average collection period. (The accounts receivable at the beginning of last year totaled $1,650,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)

e. The average sale period. (The inventory at the beginning of last year totaled $2,010,000.) (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal place.)

f. The operating cycle. (Round your intermediate calculations and final answers to 2 decimal place.)

g. The total asset turnover. (The total assets at the beginning of last year totaled $13,050,000.) (Round your final answers to 2 decimal places.)