Required information [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 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 $ 920,000 0 2,540,000 3,560,000 250,000 7,270,000 9,440,000 $ 16,710,000 $ 1,160,000 300,000 1,640,000 2,100,000 190,000 5,390,000 9,010,000 $14,400,000 Assets Current assets: Cash Marketable securities Accounts receivable, net Inventory Prepaid expenses Total current assets Plant and equipment, net Total assets Liabilities and Stockholders' Equity Liabilities: Current liabilities Note payable, 10% Total liabilities Stockholders' equity: Common stock, $75 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 3,970,000 3,640,000 7,610,000 $ 2,900,000 3,040,000 5,940,000 7,500,000 1,600,000 9,100,000 $16,710,000 7,500,000 960,000 8,460,000 $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 Company's industry: Current ratio Acid-test ratio Average period Average sale period Return on assets Debt-to-equity ratio Times interest earned ratio Price-earnings ratio 2.3 1.1 40 days 60 days 8.8% 0.7 5.8 10 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 $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 company's financial leverage positive or negative? This Year Last Year a. The times interest earned ratio b. The debt-to-equity ratio c. The gross margin percentage d. The return on total assets % % % % % % e. The return on equity f. Is the company's financial leverage positive or negative
