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Problem $14-15($Algo$)$ Comprehensive Ratio Analysis $[$LO$14-2,$ LO$14-3,$ LO$14-4,$ LO$14-5,$ LO$14-6]$

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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 $ $970,000$ $ $1,210,000$

Marketable securities $0300,000$

Accounts receivable, net $2,740,0001,840,000$

Inventory $3,610,0002,100,000$

Prepaid expenses $260,000200,000$

Total current assets $7,580,0005,650,000$

Plant and equipment, net $9,540,0009,060,000$

Total assets $ $17,120,000$ $ $14,710,000$

Liabilities and Stockholders' Equity

Liabilities:

Current liabilities $ $4,020,000$ $ $3,000,000$

Note payable, $10\%3,680,0003,080,000$

Total liabilities $7,700,0006,080,000$

Stockholders' equity:

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

Retained earnings $2,420,0001,630,000$

Total stockholders' equity $9,420,0008,630,000$

Total liabilities and stockholders' equity $ $17,120,000$ $ $14,710,000$

Lydex Company

Comparative Income Statement and Reconciliation

This Year Last Year

Sales $($all on account$)$ $ $15,870,000$ $ $13,680,000$

Cost of goods sold $12,696,00010,260,000$

Gross margin $3,174,0003,420,000$

Selling and administrative expenses $1,106,0001,608,000$

Net operating income $2,068,0001,812,000$

Interest expense $368,000308,000$

Net income before taxes $1,700,0001,504,000$

Income taxes $(30\%)510,000451,200$

Net income $1,190,0001,052,800$

Common dividends $400,000526,400$

Net income retained $790,000526,400$

Beginning retained earnings $1,630,0001,103,600$

Ending retained earnings $ $2,420,000$ $ $1,630,000$

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

Current ratio $2\mathrm{.}4$

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

Average collection period $40$ days

Average sale period $60$ days

Return on assets $9\mathrm{.}4\%$

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 $$13,080,000.)$

e$.$ The return on equity. $($Stockholders$$ equity at the beginning of last year totaled $$8,103,600.$ There has been no change in common stock over the last two years.$)$

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