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 $ $1,000,000$ $ $1,240,000$

Marketable securities $0300,000$

Accounts receivable, net $2,860,0001,960,000$

Inventory $3,640,0002,400,000$

Prepaid expenses $270,000210,000$

Total current assets $7,770,0006,110,000$

Plant and equipment, net $9,600,0009,090,000$

Total assets $ $17,370,000$ $ $15,200,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $4,050,000$ $ $3,060,000$

Note payable, $10\%3,700,0003,100,000$

Total liabilities $7,750,0006,160,000$

Stockholders' equity:

Common stock, $$75$ par value $7,500,0007,500,000$

Retained earnings $2,120,0001,540,000$

Total stockholders' equity $9,620,0009,040,000$

Total liabilities and stockholders' equity $ $17,370,000$ $ $15,200,000$

Lydex Company

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $($all on account$)$ $ $15,900,000$ $ $13,980,000$

Cost of goods sold $12,720,00010,485,000$

Gross margin $3,180,0003,495,000$

Selling and administrative expenses $1,410,0001,620,000$

Net operating income $1,770,0001,875,000$

Interest expense $370,000310,000$

Net income before taxes $1,400,0001,565,000$

Income taxes $(30\%)420,000469,500$

Net income $980,0001,095,500$

Common dividends $400,000547,750$

Net income retained $580,000547,750$

Beginning retained earnings $1,540,000992,250$

Ending retained earnings $ $2,120,000$ $ $1,540,000$

To begin your assignment you gather the following financial data and ratios that are typical of companies in Lydex Company$$s industry:

Current ratio $2\mathrm{.}3$

Acid$-$test ratio $1\mathrm{.}1$

Average collection period $32$ days

Average sale period $60$ days

Return on assets $9\mathrm{.}7\%$

Debt$-$to$-$equity ratio $0\mathrm{.}7$

Times interest earned ratio $5\mathrm{.}7$

Price$-$earnings ratio $10$

Problem $14-15$ Part $1($Algo$)$

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 $$13,110,000.)$

e$.$ The return on equity. $($Stockholders$$ equity at the beginning of last year totaled $$8,492,250.$ There has been no change in common stock over the last two years.$)$

f$.$ Is the company$$s financial leverage positive or negative?