Problem $14-15($Algo$)$ Comprehensive Ratio Analysis $[$LO$14-2,$ LO$14-3,$ LO$14-4,$ LO$14-5,$ LO$14-6]$

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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 $ $860,000$ $ $1,100,000$

Marketable securities $0300,000$

Accounts receivable, net $2,300,0001,400,000$

Inventory $3,500,0002,000,000$

Prepaid expenses $240,000180,000$

Total current assets $6,900,0004,980,000$

Plant and equipment, net $9,320,0008,950,000$

Total assets $ $16,220,000$ $ $13,930,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $3,910,000$ $ $2,780,000$

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

Total liabilities $7,510,0005,780,000$

Stockholders' equity:

Common stock, $$75$ par value $7,500,0007,500,000$

Retained earnings $1,210,000650,000$

Total stockholders' equity $8,710,0008,150,000$

Total liabilities and stockholders' equity $ $16,220,000$ $ $13,930,000$

Lydex Company

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $($all on account$)$ $ $15,760,000$ $ $12,580,000$

Cost of goods sold $12,608,0009,435,000$

Gross margin $3,152,0003,145,000$

Selling and administrative expenses $1,592,0001,564,000$

Net operating income $1,560,0001,581,000$

Interest expense $360,000300,000$

Net income before taxes $1,200,0001,281,000$

Income taxes $(30\%)360,000384,300$

Net income $840,000896,700$

Common dividends $280,000448,350$

Net income retained $560,000448,350$

Beginning retained earnings $650,000201,650$

Ending retained earnings $ $1,210,000$ $ $650,000$

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

Current ratio $2\mathrm{.}3$

Acid$-$test ratio $1\mathrm{.}0$

Average collection period $30$ days

Average sale period $60$ days

Return on assets $8\mathrm{.}2\%$

Debt$-$to$-$equity ratio $0\mathrm{.}7$

Times interest earned ratio $5\mathrm{.}8$

Price$-$earnings ratio $10$

Problem $14-15$ Part $1($Algo$)$

Required:

$1.$ 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 "Percentage" answers to $1$ decimal place and other answers to $2$ decimal places.$)$

a$.$ The times interest earned ratio.

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

c$.$ The gross margin percentage.

d$.$ The return on total assets. $($Total assets at the beginning of last year were $$12,970,000.)$

e$.$ The return on equity. $($Stockholders$$ equity at the beginning of last year totaled $$7,701,650.$ There has been no change in common stock over the last two years.$)$

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