Question 3

Required:

1. You decide first to assess the companys 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 $13,030,000.)

e. The return on equity. (Stockholders equity at the beginning of last year totaled $7,968,950. There has been no change in common stock over the last two years.)

f. Is the companys financial leverage positive or negative?

Problem 16-15 (Algo) Comprehensive Ratio Analysis [LO16-2, LO16-3, LO16-4, LO16-5, LO16-6]

Skip to question

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

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 companys financial statements, including comparing Lydexs performance to its major competitors. The companys financial statements for the last two years are as follows:

Lydex Company Comparative Balance Sheet
	This Year	Last Year
Assets
Current assets:
Cash	$ 920,000	$ 1,160,000
Marketable securities	0	300,000
Accounts receivable, net	2,540,000	1,640,000
Inventory	3,560,000	2,100,000
Prepaid expenses	250,000	190,000
Total current assets	7,270,000	5,390,000
Plant and equipment, net	9,440,000	9,010,000
Total assets	$ 16,710,000	$ 14,400,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$ 3,970,000	$ 2,900,000
Note payable, 10%	3,640,000	3,040,000
Total liabilities	7,610,000	5,940,000
Stockholders' equity:
Common stock, $75 par value	7,500,000	7,500,000
Retained earnings	1,600,000	960,000
Total stockholders' equity	9,100,000	8,460,000
Total liabilities and stockholders' equity	$ 16,710,000	$ 14,400,000

Lydex Company Comparative Income Statement and Reconciliation
	This Year	Last Year
Sales (all on account)	$ 15,820,000	$ 13,180,000
Cost of goods sold	12,656,000	9,885,000
Gross margin	3,164,000	3,295,000
Selling and administrative expenses	1,400,000	1,588,000
Net operating income	1,764,000	1,707,000
Interest expense	364,000	304,000
Net income before taxes	1,400,000	1,403,000
Income taxes (30%)	420,000	420,900
Net income	980,000	982,100
Common dividends	340,000	491,050
Net income retained	640,000	491,050
Beginning retained earnings	960,000	468,950
Ending retained earnings	$ 1,600,000	$ 960,000

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

Current ratio	2.3
Acid-test ratio	1.1
Average collection period	40	days
Average sale period	60	days
Return on assets	8.8%
Debt-to-equity ratio	0.7
Times interest earned ratio	5.8
Price-earnings ratio	10