Why is D incorrect?

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 Assets Current assets: Cash $ 1,050,000 $ 1,290,000 Marketable securities @ 300,000 Accounts receivable, net 3,060,000 2,160,000 Inventory 3,400,000 2,400,000 Prepaid expenses 240,000 220,000 Total current assets 7.750,000 6,370,000 Plant and equipment, net 9,700,000 9, 140,000 Total assets $17,450,000 $15,510,000 Liabilities and Stockholders' Equity Liabilities: Current Liabilities $ 4,400,000 $ 3,160,000 Note payable, 104 3,720,000 3,120,000 Total liabilities 8,120,000 6,280,000 Stockholders! equity: Conmon stock, 570 par value 7,000,000 7,000,000 Retained earnings 2,330,000 2,230,000 Total stockholders! equity 9,330,000 9,230,000 Total liabilities and stockholders' equity $17,450,000 $15,510,000 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,950,000 $14,480,000 Cost of goods sold 12.763,000 10,860,000 Gross margin 3,198,00 3,620,000 Selling and administrative expenses 1,918,000 1,640,800 Net operating income 1,272,000 1,980,000 Interest expense 372,000 312,800 Net income before taxes 900,000 1,668,000 Income taxes (304) 279,000 500,400 Lydex Company Comparative Income Statement and Reconciliation This Year Last Year Sales (all on account) $ 15,950,000 $14, 480,000 Cost of goods sold 12,760,000 10,860,000 Gross margin 3,190,000 3,620,000 Selling and administrative expenses 1,918,000 1.640,000 Net operating income 1,272,000 1,980,000 Interest expense 372.000 312,000 Net income before taxes 900,000 1,668,000 Income taxes (304) 270,000 500,400 Net income 630,000 1,167, 600 Common dividends 530,000 583,800 Net income retained 100,000 583,800 Beginning retained earnings 2,230,000 1,646, 200 Ending retained earnings $ 2,330,000 $2,230,000 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 1.2 32 days 60 days 8.7% 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 $13,160,000.) e. The return on equity. (Stockholders' equity at the beginning of last year totaled $8,646,200. There has been no change in common stock over the last two years.) 1. Is the company's financial leverage positive or negative? a b Answer is complete but not entirely correct. This Year Last Year The times interest earned ratio 3.42 6.35 The debt-to-equity ratio 0.87 0.68 The gross margin porcentago 20.0 % 25.0 % The return on total assets 9.5% 8.2 % The return on equity 6.8% 13.1 % to the company's financial leverage positive or negative? Positive Positive c. d