[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: Last Year 0 Lydex Company Comparative Balance Sheet This Year Assets Current assets: Cash $ 890,000 Marketable securities Accounts receivable, net 2,420,000 Inventory 3,530,000 Prepaid expenses 240,000 Total current assets 7,080,000 Plant and equipment, net 9,380,000 Total assets $16,460,000 Liabilities and Stockholders' Equity Liabilities: Current liabilities $ 3,940,000 Note payable, 10% 3,620,000 Total liabilities 7,560,000 Stockholders' equity: Common stock, $70 par value 7,000,000 Retained earnings 1,900,000 Total stockholders' equity 8,900,000 Total liabilities and stockholders' equity $16,460,000 $ 1,130,000 300,000 1,520,000 2,300,000 180,000 5,430,000 8,980,000 $14,410,000 $ 2,840,000 3,020,000 5,860,000 7,000,000 1,550,000 8,550,000 $14,410,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,790,000 $ 12,880,000 Cost of goods sold 12,632,000 9,660,000 Gross margin 3,158,000 3,220,000 Selling and administrative expenses 1,796,000 1,576,000 Net operating income 1,362,000 1,644,000 Interest expense 362,000 302,000 Net income before taxes 1,000,000 1,342,000 Income taxes (30%) 300,000 402,600 Net income 700,000 939, 400 Common dividends 350,000 469, 700 Net income retained 350,000 469, 700 Beginning retained earnings 1,550,000 1,080,300 Ending retained earnings $ 1,900,000 $ 1,550,000 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 1.0 40 days 60 days 8.5% 0.7 5.8 10 Problem 14-15 Part 1 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 $13,000,000.) e. The return on equity. (Stockholders' equity at the beginning of last year totaled $8,080,300. There has been no change in common stock over the last two years.) f. Is the company's financial leverage positive or negative? 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? This Year 3.76 0.85 20.0 % 8.5 % % Last Year 5.44 0.69 25.0 % %