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 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, $ 78 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Lydex Company $ 960,000 2,700,000 3,900,000 240,000 7,800,000 9,300,000 $ 17,100,000 $ 1,260,000 300,000 1,880,000 2,400,000 180,000 5,940,000 8,940,000 $ 14,880,000 $ 3,900,000 3,600,000 7,500,000 7,800,000 $ 2,760,000 3,090,000 5,760,000 7,800,000 1,800,000 1,320,000 9,600,000 9,120,000 $ 14,880,000 $ 17,100,000 Comparative Income Statement and Reconciliation Sales (all on account) Cast of goods sold This Year $ 15,750,000 12,600,000 3,150,000 1,598,080 1,568,000 Last Year $ 12,480,000 9,900,000 2,580,000 Gross margin Selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes (30%) Net income Common dividends Net income retained Beginning retained earnings Ending retained earnings 1,560,000 1,020,000 360,000 300,000 1,200,000 720,000 368,080 216,000 848,080 504,000 368,000 252,000 488,999 252,000 1,328,080 1,868,000 $ 1,800,000 $ 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 2.3 1.2 Average collection period 30 days Average sale period 60 days Return on assets 9.5% Debt-to-equity ratio 8.65 Times interest earned ratio Price-earnings ratio 5.7 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 $12,960,000.) e. The return on equity. (Stockholders' equity at the beginning of last year totaled $9,048,000. 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 20.0 % 25.0 % 96 96 e. The return on equity 96 96 f. Is the company's financial leverage positive or negative? Positive Positive