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

$[$The following information applies to the questions displayed below.$]$

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:

$\backslash$begin$\{$tabular$\}\{|$c$|$c$|$c$|$c$|\}$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{\backslash$begin$\{$tabular$\}\{$l$\}$

Lydex Company $\backslash \backslash$

Comparative Balance Sheet

$\backslash$end$\{$tabular$\}\}\backslash \backslash$

$\backslash$hline & & This Year & Last Year $\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{$Assets$\}\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{$Current assets:$\}\backslash \backslash$

$\backslash$hline Cash & & $\backslash$$ $890,000$ & $\backslash$$ $1,130,000\backslash \backslash$

$\backslash$hline Marketable securities & & $0$ & $300,000\backslash \backslash$

$\backslash$hline Accounts receivable, net & & $2,420,000$ & $1,520,000\backslash \backslash$

$\backslash$hline Inventory & & $3,530,000$ & $2,300,000\backslash \backslash$

$\backslash$hline Prepaid expenses & & $240,000$ & $180,000\backslash \backslash$

$\backslash$hline Total current assets & & $7,080,000$ & $5,430,000\backslash \backslash$

$\backslash$hline Plant and equipment, net & & $9,380,000$ & $8,980,000\backslash \backslash$

$\backslash$hline Total assets & & $\backslash$$ $16,460,000$ & $\backslash$$ $14,410,000\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{$Liabilities and Stockholders' Equity$\}\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{$Liabilities:$\}\backslash \backslash$

$\backslash$hline Current liabilities & & $\backslash$$ $3,940,000$ & $\backslash$$ $2,840,000\backslash \backslash$

$\backslash$hline Note payable, $10\backslash \%$ & & $3,620,000$ & $3,020,000\backslash \backslash$

$\backslash$hline Total liabilities & & $7,560,000$ & $5,860,000\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{$Stockholders$\text{'}$ equity:$\}\backslash \backslash$

$\backslash$hline Common stock, $\backslash$$$70$ par value & & $7,000,000$ & $7,000,000\backslash \backslash$

$\backslash$hline Retained earnings & & $1,900,000$ & $1,550,000\backslash \backslash$

$\backslash$hline Total stockholders' equity & & $8,900,000$ & $8,550,000\backslash \backslash$

$\backslash$hline Total liabilities and stockholders' equity & & $\backslash$$ $16,460,000$ & $\backslash$$ $14,410,000\backslash \backslash$

$\backslash$hline $\backslash$multicolumn$\{4\}\{|$l$|\}\{\backslash$begin$\{$tabular$\}\{$l$\}$

Lydex Company $\backslash \backslash$

Comparative Income Statement and Reconciliation

$\backslash$end$\{$tabular$\}\}\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}\backslash$begin$\{$tabular$\}\{|$c$|$c$|$c$|\}$

$\backslash$hline $\backslash$multicolumn$\{3\}\{|$l$|\}\{\backslash$begin$\{$tabular$\}\{$l$\}$

Lydex Company $\backslash \backslash$

Comparative Income Statement and Reconciliation $\backslash \backslash$

This Year Last Year

$\backslash$end$\{$tabular$\}\}\backslash \backslash$

$\backslash$hline Sales $($all on account$)$ & $\backslash$$ $15,790,000$ & $\backslash$$ $12,880,000\backslash \backslash$

$\backslash$hline Cost of goods sold & $12,632,000$ & $9,660,000\backslash \backslash$

$\backslash$hline Gross margin & $3,158,000$ & $3,220,000\backslash \backslash$

$\backslash$hline Selling and administrative expenses & $1,796,000$ & $1,576,000\backslash \backslash$

$\backslash$hline Net operating income & $1,362,000$ & $1,644,000\backslash \backslash$

$\backslash$hline Interest expense & $362,000$ & $302,000\backslash \backslash$

$\backslash$hline Net income before taxes & $1,000,000$ & $1,342,000\backslash \backslash$

$\backslash$hline Income taxes $(30\backslash \%)$ & $300,000$ & $402,600\backslash \backslash$

$\backslash$hline Net income & $700,000$ & $939,400\backslash \backslash$

$\backslash$hline Common dividends & $350,000$ & $469,700\backslash \backslash$

$\backslash$hline Net income retained & $350,000$ & $469,700\backslash \backslash$

$\backslash$hline Beginning retained earnings & $1,550,000$ & $1,080,300\backslash \backslash$

$\backslash$hline Ending retained earnings & $\backslash$$ $1,900,000$ & $\backslash$$ $1,550,000\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$

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

$\backslash$begin$\{$tabular$\}\{$lr$\}$

Current ratio & $2\mathrm{.}3\backslash \backslash$

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

Average collection period & $40$ days $\backslash \backslash$

Average sale period & $60$ days $\backslash \backslash$

Return on assets & $\backslash (8\mathrm{.}5\backslash \%\backslash )\backslash \backslash$

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

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

Price$-$earnings ratio & $10$

$\backslash$end$\{$tabular$\}$ Required:

$1.$ To assess the company's performance in terms of debt management and profitability, compute the following for this year and last year:

Note: Round your "Percentage" answers to $1$ decimal place and other answers to $\backslash (\backslash$mathbf$\{2\}\backslash )$ 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 $\backslash$$$13,000,000.)$

e$.$ The return on equity. $($Stockholders$\text{'}$ equity at the beginning of last year totaled $\backslash$$$8,080,300.$ There has been no change in common stock over the last two years.$)$

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