[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 $ 1,020,000 2,940,000 3,660,000 270,000 7,890,000 9,640,000 $ 17,530,000 $ 1,260,000 300,eee 2,048,890 2,100,000 210,000 5,910,000 9,110,000 $ 15,020, eee Assets Current assets: Cash Marketable securities Accounts receivable, not 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 $ 4,070,000 3,700,000 7,270,000 $ 3,100,000 3,100,000 6,200,000 7,500,000 2,260,000 9,760,000 $ 17,530,000 7,500,000 1,320,000 8,820.000 $ 15,020,000 Lydex Company Comparative Income Statement and Reconciliation This Year Sales (all on account) $ 15,920,000 Cost of goods sold 12,236 000 Gross margin 3,184,00 Selling and administrative expenses 1,014, Net operating income 2,170,000 Interest expense 370,000 Net income before taxes 1,800,000 Income taxes (30%) 540,000 Net income 1,260,000 Common dividends 320,000 Net income retained 940,000 Beginning retained earnings 1,320,000 Ending retained earnings $ 2,260,000 Last Year $ 14,180,000 10,635,000 3,545,000 1,628,000 1,917,000 310,000 1,607,000 482, 10e 1,124,900 562,450 562,450 757,550 $ 1,320,000 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 collection period Average sale period Return on assets Debt-to-equity ratio Times interest earned ratio Price-earnings ratio 2.3 1.1 32 days 60 days 9.9% 0.7 5.9 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 $13,130,000.) e. The return on equity (Stockholders' equity at the beginning of last year totaled $8.257.550. There has been no change in common stock over the last two years.) 1. Is the company's financial leverage positive or negative? Last Year 6.18 This Year 587 000 200 250 The times interest eamed ratio b. The debt-to-equity ratio The gross margin percentage d The return on total assets o. The retum an equity is the company's financial leverage positive or negative Positive Positive 5 94 7
