Question

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	$	1,000,000	$	1,240,000
Marketable securities		0		300,000
Accounts receivable, net		2,860,000		1,960,000
Inventory		3,640,000		2,400,000
Prepaid expenses		270,000		210,000
Total current assets		7,770,000		6,110,000
Plant and equipment, net		9,600,000		9,090,000
Total assets	$	17,370,000	$	15,200,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	4,050,000	$	3,060,000
Note payable, 10%		3,700,000		3,100,000
Total liabilities		7,750,000		6,160,000
Stockholders' equity:
Common stock, $75 par value		7,500,000		7,500,000
Retained earnings		2,120,000		1,540,000
Total stockholders' equity		9,620,000		9,040,000
Total liabilities and stockholders' equity	$	17,370,000	$	15,200,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales (all on account)	$	15,900,000	$	13,980,000
Cost of goods sold		12,720,000		10,485,000
Gross margin		3,180,000		3,495,000
Selling and administrative expenses		1,410,000		1,620,000
Net operating income		1,770,000		1,875,000
Interest expense		370,000		310,000
Net income before taxes		1,400,000		1,565,000
Income taxes (30%)		420,000		469,500
Net income		980,000		1,095,500
Common dividends		400,000		547,750
Net income retained		580,000		547,750
Beginning retained earnings		1,540,000		992,250
Ending retained earnings	$	2,120,000	$	1,540,000

To begin your assigment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:

Current ratio

2.3

Acid-test ratio

1.1

Average collection period

32

days

Average sale period

60

days

Return on assets

9.7

%

Debt-to-equity ratio

.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: (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 $13,110,000.)

e.

The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,492,250. 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 $102 per share and that at the end of last year it was $70. For both this year and last year, compute: (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 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 $1,710,000.)
e.	The average sale period. (The inventory at the beginning of last year totaled $2,070,000.)
f.	The operating cycle.
g.	The total asset turnover. (The total assets at the beginning of last year totaled $14,650,000.)