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 YearLast YearAssets Current assets: Cash$ 940,000$ 1,180,000Marketable securities0300,000Accounts receivable, net2,620,0001,720,000Inventory3,580,0002,300,000Prepaid expenses250,000190,000Total current assets7,390,0005,690,000Plant and equipment, net9,480,0009,030,000Total assets$ 16,870,000$ 14,720,000Liabilities and Stockholders' Equity Liabilities: Current liabilities$ 3,990,000$ 2,940,000Note payable, 10%3,660,0003,060,000Total liabilities7,650,0006,000,000Stockholders' equity: Common stock, $75 par value7,500,0007,500,000Retained earnings1,720,0001,220,000Total stockholders' equity9,220,0008,720,000Total liabilities and stockholders' equity$ 16,870,000$ 14,720,000

Lydex Company Comparative Income Statement and Reconciliation This YearLast YearSales (all on account)$ 15,840,000$ 13,380,000Cost of goods sold12,672,00010,035,000Gross margin3,168,0003,345,000Selling and administrative expenses1,602,0001,596,000Net operating income1,566,0001,749,000Interest expense366,000306,000Net income before taxes1,200,0001,443,000Income taxes (30%)360,000432,900Net income840,0001,010,100Common dividends340,000505,050Net income retained500,000505,050Beginning retained earnings1,220,000714,950Ending retained earnings$ 1,720,000$ 1,220,000

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

Current ratio2.4 Acid-test ratio1.1 Average collection period40daysAverage sale period60daysReturn on assets9.1% Debt-to-equity ratio0.7 Times interest earned ratio5.7 Price-earnings ratio10

Problem 14-15 Part 1 (Algo)

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 $13,050,000.)

e. The return on equity. (Stockholders equity at the beginning of last year totaled $8,214,950. There has been no change in common stock over the last two years.)

f. Is the companys financial leverage positive or negative?