As an employee with the Toronto Dominion Bank I must decide whether or not I would arrange loans to my clients. Some of my clients range from medium to large corporations. Canadian Tire, which is one of my largest client and one of the largest corporations in Canada, has recently approached me on arranging both long-term and short-term financing. Canadian Tire has also provided me with their 2000 Annual Report to support their loan application. To decide my decision to arrange a loan to Canadian Tire I must look into their annual report thoroughly. In order to justify my decision I must evaluate Canadian Tire's financial statements based on there liquidity, leverage and profitability of the company.
When arranging a loan to Canadian Tire I must consider the liquidity of the company. Liquidity is the analysis of the company's solvency. It measures Canadian Tire's ability to pay their debts as they come due.
The current ratio is a measurement of the company's ability to pay short-term debts. At the beginning of the year 2000 Canadian Tire's current ratio was 1.32 to 1. At the end of the year the current ratio was 1.36 to 1. The current ratio improved very slightly up only by 0.04 because cash grew by a small percentage during the year. The cash growth results from the issuance of Class A Non-Voting Shares in 2000 have also contributed to the improvement of the current ratio. Although the current ratio does not meet the expectations of a 2 to 1 standard the company is still able to pay off their short term debts slowly.
The accounts receivable turnover counts the number of times per year the AR has been converted into cash. Canadian Tire's AR turnover has improved from the...