You have just been hired as a financial analyst for Lydex Company, a manufacture

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:

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

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.)

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

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.)

The book value per share of common stock.

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.)

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:

Explanation / Answer

1) Ratio analysis is a widely used tool to asses the financial position of company in terms of liquidity,solvency and profitability. There are various ratios like current ratio, liquidity ratio which helps to determine how soon a firm can meet its short term obligations by using its current assets. Similarly, various debt ratios assess the firms ability to pay interest regularly and installment of principal amount on due date.

a)  Times interest earned ratio: measures the firm's ability to pay the interest on its debt on due date. In other words it helps to determine if company will be able to make interest payment on its debt on time. Is is also known as Interest coverage ratio. It is calculated by dividing company's net operating income ( Earnings before Interest and tax ) by interest expense.

Times interest earned ratio = Earnings before Interest and tax / Interest expense

The values of Earnings before Interest and tax and interest expense are taken from the comparative income statement,

Times interest earned ratio (Current year) = $1,770,000 / $3,70,000

Times interest earned ratio (Current year) = 4.78

Times interest earned ratio (Last year) = $1,875,000 / $3,10,000

Times interest earned ratio (Last year) = 6.05

Therefore, times interest earned ratio for current year is 4.78 and for last year is 6.05.

b) Debt-to-equity ratio: reflects the amount of assets financed by creditors and the portion of assets financed by shareholders. This ratio is used to measure the company’s financial leverage. It is calculated by dividing total liabilities by total shareholder’s equity.

Debt-to-equity ratio = Total liabilities / Total shareholder’s equity.

The values of  total liabilities and total shareholder’s equity is taken from balance sheet.

Debt-to-equity ratio (This year) = $7,750,000 / $9,620,000

Debt-to-equity ratio (This year) = 0.81

Debt-to-equity ratio (Last year) = $6,160,000 / $9,040,000

Debt-to-equity ratio (Last year) = 0.68

Therefore, debt-to-equity ratio for this yearis 0.81 while for last year it is 0.68.

c) Gross margin percentage: Gross margin means total sales revenue less cost of goods sold. It is also known as gross profit before selling and administrative expenses. It indicates the gross profit generated by sale of goods. The gross profit ratio is calculated by dividing gross profit by total sales.

Gross margin percentage = (Gross profit / Total sales) * 100

Gross margin percentage (This year) =($ 3,180,000 / $15,900,000) * 100

Gross margin percentage (This year) = 20%

Gross margin percentage (Last year) = ($3,495,000 / $13,980,000) * 100

Gross margin percentage (Last year) = 25%

Therefore, gross margin percentage for this year is 20% while for last year it was 25%.

d) Return on total assets: measures the efficiency of firm in generating profits by using its available assets. It is calculated by dividing the earnings before interest and tax by average total assets.

Return on total assets = ( Earnings before interest and tax / average total assets) * 100

Average total assets(This year) = ($17,370,000 + $15,200,000) / 2

Average total assets(This year) = $16,285,000

Average total assets(Last year) = ($15,200,000 + $13,110,000) / 2

Average total assets(Last year) = $14,155,000

Return on total assets (This year) = ($1,770,000 / $16,285,000) * 100.

Return on total assets (This year) = 10.87%

Return on total assets (Last year) = ($1,875,000 / $14,155,000) * 100

Return on total assets (Last year) = 13.25%

Therefore, return on assets for this year is 10.87% while for last year it was 13.25%.

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