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 $ $890,000$ $ $1,130,000$

Marketable securities $0300,000$

Accounts receivable, net $2,420,0001,520,000$

Inventory $3,530,0002,300,000$

Prepaid expenses $240,000180,000$

Total current assets $7,080,0005,430,000$

Plant and equipment, net $9,380,0008,980,000$

Total assets $ $16,460,000$ $ $14,410,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $3,940,000$ $ $2,840,000$

Note payable, $10\%3,620,0003,020,000$

Total liabilities $7,560,0005,860,000$

Stockholders' equity:

Common stock, $$70$ par value $7,000,0007,000,000$

Retained earnings $1,900,0001,550,000$

Total stockholders' equity $8,900,0008,550,000$

Total liabilities and stockholders' equity $ $16,460,000$ $ $14,410,000$

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 $12,632,0009,660,000$

Gross margin $3,158,0003,220,000$

Selling and administrative expenses $1,796,0001,576,000$

Net operating income $1,362,0001,644,000$

Interest expense $362,000302,000$

Net income before taxes $1,000,0001,342,000$

Income taxes $(30\%)300,000402,600$

Net income $700,000939,400$

Common dividends $350,000469,700$

Net income retained $350,000469,700$

Beginning retained earnings $1,550,0001,080,300$

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 Companys industry:

Current ratio $2\mathrm{.}3$

Acid$-$test ratio $1\mathrm{.}0$

Average collection period $40$ days

Average sale period $60$ days

Return on assets $8\mathrm{.}5\%$

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

Times interest earned ratio $5\mathrm{.}8$

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 $$13,000,000.)$

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 companys financial leverage positive or negative?