Required information

Skip to question

$[$The following information applies to the questions displayed below.$]$

Lydex 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 $ $960,000$ $ $1,260,000$

Marketable securities $0300,000$

Accounts receivable, net $2,700,0001,800,000$

Inventory $3,900,0002,400,000$

Prepaid expenses $240,000180,000$

Total current assets $7,800,0005,940,000$

Plant and equipment, net $9,300,0008,940,000$

Total assets $ $17,100,000$ $ $14,880,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $3,900,000$ $ $2,760,000$

Note payable, $10\%3,600,0003,000,000$

Total liabilities $7,500,0005,760,000$

Stockholders' equity:

Common stock, $ $78$ par value $7,800,0007,800,000$

Retained earnings $1,800,0001,320,000$

Total stockholders' equity $9,600,0009,120,000$

Total liabilities and stockholders' equity $ $17,100,000$ $ $14,880,000$

Lydex Company

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $($all on account$)$ $ $15,750,000$ $ $12,480,000$

Cost of goods sold $12,600,0009,900,000$

Gross margin $3,150,0002,580,000$

Selling and administrative expenses $1,590,0001,560,000$

Net operating income $1,560,0001,020,000$

Interest expense $360,000300,000$

Net income before taxes $1,200,000720,000$

Income taxes $(30\%)360,000216,000$

Net income $840,000504,000$

Common dividends $360,000252,000$

Net income retained $480,000252,000$

Beginning retained earnings $1,320,0001,068,000$

Ending retained earnings $ $1,800,000$ $ $1,320,000$

The following financial data and ratios are typical of companies in Lydex Company$$s industry:

Current ratio $2\mathrm{.}3$

Acid$-$test ratio $1\mathrm{.}2$

Average collection period $30$ days

Average sale period $60$ days

Return on assets $9\mathrm{.}5\%$

Debt$-$to$-$equity ratio $0\mathrm{.}65$

Times interest earned ratio $5\mathrm{.}7$

Price$-$earnings ratio $10$

Required:

$1.$ To assess the company$$s performance in terms of debt management and profitability, compute the following for this year and last year:

Note: Round your "Percentage" answers to $1$ decimal place and other answers to $2$ decimal places.

The times interest earned ratio.

The debt$-$to$-$equity ratio.

The gross margin percentage.

The return on total assets. $($Total assets at the beginning of last year were $$12,960,000.)$

The return on equity. $($Stockholders$$ equity at the beginning of last year totaled $$9,048,000.$ There has been no change in common stock over the last two years.$)$

Is the company$$s financial leverage positive or negative?