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Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6] [The following information applies to the...

Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6]

[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 $ 960,000 $ 1,260,000
Marketable securities 0 300,000
Accounts receivable, net 2,700,000 1,800,000
Inventory 3,900,000 2,400,000
Prepaid expenses 240,000 180,000
Total current assets 7,800,000 5,940,000
Plant and equipment, net 9,300,000 8,940,000
Total assets $ 17,100,000 $ 14,880,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 3,900,000 $ 2,760,000
Note payable, 10% 3,600,000 3,000,000
Total liabilities 7,500,000 5,760,000
Stockholders' equity:
Common stock, $78 par value 7,800,000 7,800,000
Retained earnings 1,800,000 1,320,000
Total stockholders' equity 9,600,000 9,120,000
Total liabilities and stockholders' equity $ 17,100,000 $ 14,880,000
Lydex Company
Comparative Income Statement and Reconciliation
This Year Last Year
Sales (all on account) $ 15,750,000 $ 12,480,000
Cost of goods sold 12,600,000 9,900,000
Gross margin 3,150,000 2,580,000
Selling and administrative expenses 1,590,000 1,560,000
Net operating income 1,560,000 1,020,000
Interest expense 360,000 300,000
Net income before taxes 1,200,000 720,000
Income taxes (30%) 360,000 216,000
Net income 840,000 504,000
Common dividends 360,000 252,000
Net income retained 480,000 252,000
Beginning retained earnings 1,320,000 1,068,000
Ending retained earnings $ 1,800,000 $ 1,320,000

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 1.2
Average collection period 30 days
Average sale period 60 days
Return on assets 9.5 %
Debt-to-equity ratio 0.65
Times interest earned ratio 5.7
Price-earnings ratio 10

Problem 15-15 Part 1

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 $12,960,000.)

e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $9,048,000. There has been no change in common stock over the last two years.)

f. Is the company’s financial leverage positive or negative?

Homework Answers

Answer #1
This Year Calculation Last Year Calculation
Times Interest earned(Interest expenses / Operating Income) 0.23 $360,000/$1,560,000 0.29 $300,000/$1,020,000
Debt to Equity ratio(Total Liabilities / Total shareholder's equity) 0.78 $7,500,000/$9,600,000 0.63 $5,760,000/$9,120,000
Gross Margin Percentage(Gross Margin / Sales) 20.0% $3,150,000/$15,750,000 20.7% $2,580,000/$12,480,000
Return on Total Assets =Net Income / Average Total Assets 5.3% [$840,000/($14,880,000+$17,100,000)/2] 3.6% [$504,000/($12,960,000+$14,880,000)/2]
Return on equity =Net income / Average Stockholder's equity 9.0% [$840,000/($9,120,000+$9,600,000)/2] 5.5% [$504,000/($9,048,000+$9,120,000)/2]
Financial Leverage Positive Positive
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