Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15
ID: 2498939 • Letter: P
Question
Problem 15-15 Comprehensive Ratio Analysis [LO15-2, LO15-3, LO15-4, LO15-5, LO15-6] 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 $ 1,020,000 $ 1,260,000 Marketable securities 0 300,000 Accounts receivable, net 2,940,000 2,040,000 Inventory 3,660,000 2,100,000 Prepaid expenses 270,000 210,000 Total current assets 7,890,000 5,910,000 Plant and equipment, net 9,640,000 9,110,000 Total assets $ 17,530,000 $ 15,020,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 4,070,000 $ 3,100,000 Note payable, 10% 3,700,000 3,100,000 Total liabilities 7,770,000 6,200,000 Stockholders' equity: Common stock, $75 par value 7,500,000 7,500,000 Retained earnings 2,260,000 1,320,000 Total stockholders' equity 9,760,000 8,820,000 Total liabilities and stockholders' equity $ 17,530,000 $ 15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,920,000 $ 14,180,000 Cost of goods sold 12,736,000 10,635,000 Gross margin 3,184,000 3,545,000 Selling and administrative expenses 1,014,000 1,628,000 Net operating income 2,170,000 1,917,000 Interest expense 370,000 310,000 Net income before taxes 1,800,000 1,607,000 Income taxes (30%) 540,000 482,100 Net income 1,260,000 1,124,900 Common dividends 320,000 562,450 Net income retained 940,000 562,450 Beginning retained earnings 1,320,000 757,550 Ending retained earnings $ 2,260,000 $ 1,320,000 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 9.9 % Debt-to-equity ratio .67 Times interest earned ratio 5.9 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 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.) e. The return on equity. (Stockholders’ equity at the beginning of last year totaled $8,257,550. There has been no change in common stock over the last two years.) f. Is the company’s financial leverage positive or negative?
Explanation / Answer
Current ratio = total current assets/ total current liabiliites
= 7890,000/4070,000
= 1.93
Acid test ratio = 1020,000(cash )+ a/c receivabe 2940,000/ 4070,000
=.97
Average collection period = 15920,000(sales)/ 2265.000(average a/ c receiavable)
= 7.02
period = 365/7.02 = 51.99 days
Average sale period = COGS 12,736,000/ 2880,000(average invenotry)
=4.42
= 365/4.42 = 82.58 days
Return on assets = net income/ average total assets
= 1260,000/ 6900,000
= 18.26%
Debt to equity ratio = total debts/ total equity
= 7770,000/ 9760,000
=.79
Times interest earned ratio = income before interst and tac/ intereres
= 2170,000/370,000
= 5.86
company has positive financial ratio
10%(1-.3) = 7%
Return on common stockholder's equity = 12.90%
hence 12.90 - 7 = 5.90%