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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 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

$

1,020,000

$

1,260,000

Marketable securities

0

300,000

Accounts receivable, net

2,940,000

2,040,000

Inventory

3,660,000

2,100,000

Prepaid expenses

270,000

210,000

Total current assets

7,890,000

5,910,000

Plant and equipment, net

9,640,000

9,110,000

Total assets

$

17,530,000

$

15,020,000

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities

$

4,070,000

$

3,100,000

Note payable, 10%

3,700,000

3,100,000

Total liabilities

7,770,000

6,200,000

Stockholders' equity:

Common stock, $75 par value

7,500,000

7,500,000

Retained earnings

2,260,000

1,320,000

Total stockholders' equity

9,760,000

8,820,000

Total liabilities and stockholders' equity

$

17,530,000

$

15,020,000

Lydex Company

Comparative Income Statement and Reconciliation

This Year

Last Year

Sales (all on account)

$

15,920,000

$

14,180,000

Cost of goods sold

12,736,000

10,635,000

Gross margin

3,184,000

3,545,000

Selling and administrative expenses

1,014,000

1,628,000

Net operating income

2,170,000

1,917,000

Interest expense

370,000

310,000

Net income before taxes

1,800,000

1,607,000

Income taxes (30%)

540,000

482,100

Net income

1,260,000

1,124,900

Common dividends

320,000

562,450

Net income retained

940,000

562,450

Beginning retained earnings

1,320,000

757,550

Ending retained earnings

$

2,260,000

$

1,320,000

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

32

days

Average sale period

60

days

Return on assets

9.9

%

Debt-to-equity ratio

0.7

Times interest earned ratio

5.9

Price-earnings ratio

10

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 $13,130,000.)

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.)

f. Is the companys financial leverage positive or negative?