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: $ 820,000 2,860,000 3.640.000 270.000 7,590,000 9.600.000 $17,190,000 5 1,060,000 300.000 1,960,000 2.400.000 210.000 5,930,000 9,090.000 $15,020,000 Marketable securities Accounta recevable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current abilities Note payable, 108 Total llabilities Stockholders' equity: Common stock, $75 par value Retained earnings Total stockholders' equity Total llabilities and stockholders' equity $ 4,050,000 3,700,000 2,750,000 $3,060,000 3,100,000 6,160,000 7,500,000 1,940,000 9,440,000 $17,190,000 2.500.000 1,360,000 8,860,000 $15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $15,900,000 $13,980,000 Coat of goods sold 12 220.000 10485.000 Gross margin 3,180,000 3,495,000 Selling and administrative expenses 1.410,000 1.620,000 Niet operating income 1.770.000 1.875,000 Interest expense 220,000 310,000 Net Income before taxes 1.400,000 1,565,000 Income taxes (308) 420.000 469.500 Not income 1.095,500 Common dividends 400,000 547.750 Net Income retained 580,000 547,750 Deginning retained earnings 12160000 912250 Ending retained earnings $ 1,940,000 $ 1,360,000 To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company's industry:

Answer 1

Solution

Lydex Company
Common size Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash		4.8%		7.1%
Marketable securities		0.0%		2.0%
Accounts receivable, net		16.6%		13.0%
Inventory		21.2%		16.0%
Prepaid expenses		1.6%		1.4%
Total current assets		44.2%		39.5%
Plant and equipment, net		55.8%		60.5%
Total assets		100.0%		100.0%
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities		23.6%		20.4%
Bonds payable, 12%		21.5%		20.6%
Total liabilities		45.1%		41.0%
Stockholders' equity:
Common stock, $15 par value		43.6%		49.9%
Retained earnings		11.3%		9.1%
Total stockholders' equity		54.9%		59.0%
Total liabilities and stockholders' equity		100.0%		100.0%

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Lydex Company
Common size Income statement
	This Year		Last Year
Sales (all on account)		100.0%		100.0%
Cost of goods sold		80.0%		75.0%
Gross margin		20.0%		25.0%
Selling and administrative expenses		8.9%		11.6%
Net operating income		11.1%		13.4%
Interest expense		2.3%		2.2%
Net income before taxes		8.8%		11.2%
Income taxes (30%)		2.6%		3.4%
Net income		6.2%		7.8%