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:

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.)

d.   The return on total assets. (Total assets at the beginning of last year were $13,000,000.)

3.  
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 your intermediate calculations and final answer to 2 decimal places.)

d.   The average collection period. (The accounts receivable at the beginning of last year totaled $1,600,000.)
e.   The average sale period. (The inventory at the beginning of last year totaled $1,960,000.)

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.

d. Return on total assets

Return on total assets = Net income / Average total assets

Average total assets of this year = ($16,460,000 + $14,410,000) / 2 = $15,435,000

Return on total assets for this year = $700,000 / $15,435,000 = 0.045 = 4.5%

Average total assets for last year = ($14,410,000 + $13,000,000) / 2 = $13,705,000

Return on total assets for last year = $939,400 / $13,705,000 = 0.069 = 6.9%

3.

d. Average collection period

Average collection period = (Average accounts receivables / Credit sales) * 365 days

Average accounts receivable for this year = ($2,420,000 + $1,520,000) / 2 = $1,970,000

Average collection period for this year = ($1,970,000 / $15,790,000) * 365 = 45.54 days

Average accounts receivable for last year = ($1,520,000 + $1,600,000) / 2 = $1,560,000

Average collection period for last year = ($1,560,000 / $12,880,000) * 365 = 44.21 days

e. Average sale period

Average sale period = (Average inventory / Cost of goods sold) * 365

Average inventory for this year = ($3,530,000 + $2,300,000) / 2 = $2,915,000

Average sale period for this year = ($2,915,000 / $12,632,000) * 365 = 84.23 days

Average inventory for last year = ($2,300,000 + $1,960,000) / 2 = $2,130,000

Average sale period for last year = ($2,130,000 / $9,660,000) * 365 = 80.48 days

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