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 $ 1,000,000 2,860,000 3,640,000 270,000 7,770,000 9,600,000 $ 17,370,000 $ 1,240,000 300,000 1,960,000 2,400,000 210,000 6,110,000 9,090,000 $ 15,200,000 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, $75 par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 4,050,000 3,700,000 7,750,000 $ 3,060,000 3,100,000 6,160,000 7,500,000 2,120,000 9,620,000 $ 17,370,000 7,500,000 1,540,000 9,040,000 $ 15,200,000 Lydex Company Comparative Income Statement and Reconciliation This Year Sales (all on account) $ 15,900,000 Cost of goods sold 12,720,000 Gross margin 3,180,000 Selling and administrative expenses 1,410,000 Net operating income 1,770,000 Interest expense 370,000 Net income before taxes 1,400,000 Income taxes (30%) 420,000 Net income 980,000 Common dividends 400,000 Net income retained 580,000 Beginning retained earnings 1,540,000 Ending retained earnings $ 2,120,000 Last Year $ 13,980,000 10,485,000 3,495,000 1,620,000 1,875,000 310,000 1,565,000 469,500 1,095,500 547,750 547,750 992,250 $ 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 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 1.1 32 days 60 days 9.7% 0.7 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 $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.) 1. 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 e. The return on equity f. Is the company's financial leverage positive or negative? % %