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
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 | $ | 1,010,000 | $ | 1,250,000 |
| Marketable securities | 0 | 300,000 | ||
| 2,900,000 | 2,000,000 | |||
| Inventory | 3,650,000 | 2,000,000 | ||
| Prepaid expenses | 270,000 | 210,000 | ||
| Total current assets | 7,830,000 | 5,760,000 | ||
| Plant and equipment, net | 9,620,000 | 9,100,000 | ||
| Total assets | $ | 17,450,000 | $ | 14,860,000 |
| Liabilities and |
||||
| Liabilities: | ||||
| Current liabilities | $ | 4,060,000 | $ | 3,080,000 |
| Note payable, 10% | 3,700,000 | 3,100,000 | ||
| Total liabilities | 7,760,000 | 6,180,000 | ||
| Stockholders' equity: | ||||
| Common stock, $70 par value | 7,000,000 | 7,000,000 | ||
| 2,690,000 | 1,680,000 | |||
| Total stockholders' equity | 9,690,000 | 8,680,000 | ||
| Total liabilities and stockholders' equity | $ | 17,450,000 | $ | 14,860,000 |
| Lydex Company Comparative Income Statement and Reconciliation |
||||
| This Year | Last Year | |||
| Sales (all on account) | $ | 15,910,000 | $ | 14,080,000 |
| Cost of goods sold | 12,728,000 | 10,560,000 | ||
| Gross margin | 3,182,000 | 3,520,000 | ||
| Selling and administrative expenses | 912,000 | 1,624,000 | ||
| Net operating income | 2,270,000 | 1,896,000 | ||
| Interest expense | 370,000 | 310,000 | ||
| Net income before taxes | 1,900,000 | 1,586,000 | ||
| Income taxes (30%) | 570,000 | 475,800 | ||
| Net income | 1,330,000 | 1,110,200 | ||
| Common dividends | 320,000 | 555,100 | ||
| Net income retained | 1,010,000 | 555,100 | ||
| Beginning retained earnings | 1,680,000 | 1,124,900 | ||
| Ending retained earnings | $ | 2,690,000 | $ | 1,680,000 |
To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company’s industry:
| 2.3 | ||
| Acid-test ratio | 1.1 | |
| Average collection period | 32 | days |
| Average sale period | 60 | days |
| Return on assets | 9.8 | % |
| Debt-to-equity ratio | 0.7 | |
| Times interest earned ratio | 5.8 | |
| Price-earnings ratio | 10 | |
3. You decide, finally, to assess the company’s liquidity and asset management. For both this year and last year, compute:
a.
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 $1,720,000.) (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 $2,080,000.) (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 $13,120,000.) (Round your final answers to 2 decimal places.)
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