Answer

Financial ratio analysis of Canadian Tire

1. Brief Introduction of the Report

The purpose of this report is to analyze the financial performance of Canadian Tire using ratios for 2018 and 2019.  The report begins by describing the nature of the company, its business, and products and services it offers. The report then analyses the company’s performance using profitability, liquidity and solvency ratios. The report analyses the cash flow of the company as at December, 28, 2019. The report ends with a conclusion on the major findings and a recommendation on whether to invest in the company or not.

 1.1 Nature of the Corporation’s Business

Canadian Tire is a company that includes a family of businesses based in Canada which operates in various sectors of the economy. The company’s businesses include a CT REIT, a bank and a retailing segment among others.   Canadian Tire, the retail arm of the business, includes various divisions such as lifestyle, sporting, fixation and repairs, vehicles division, seasonal and gardening.  The corporation is a listed and publicly traded on the Stock Exchange of Toronto and is headquartered in Toronto, Ontario in Canada (Annual report, 2019).  Canadian Tire is among the 60 largest companies that are traded publicly in Canada. Alfred J. Billes and J. William Billes started the company in 1922; 98 years ago.  About 1,746 outlets that offer retail items and gasoline are operated by the company. It employed about 58,000 people in 2019.  Canadian Tire has seven subsidiaries made up of  Party City, Helly Hansen, Mark’s, FGL Sports, PartSource, Canadian Tire Petroleum and Canadian Tire Bank making an interrelated business network(Annual report, 2019).  Automotive, sports, leisure and home products are the main products offered by Canadian Tire.  Mr. Greg Hicks serves the company in the position of the president and also doubles up as the chief executive officer(Annual report, 2019).  As of 2019, the company generated revenues of $14.534 billion, profit after tax of $894.8 million and total assets totaled $19.518 billion in 2019. The growth of the corporation over time is mainly attributed to Canadian Tire retail business.  Currently, there is a store about 25 kilometers of 90% of all Canadian citizens. This has made Canadian retail stores some of the most visited stores throughout the year (Annual report, 2019).

2. Financial Statement Summary
3. The Corporation’s most Recent:

Table 1: Annual Income Statement Summary

For the year ended 28th December, 2019	C$ in millions
Revenue	14,534.4
Cost of goods sold	9,660.6
Gross profit	4,873.8
Other income	(13.4)
General , Selling & Admin expenses	3,437.5
Finance costs	266.8
Redeemable financial instrument fair value adjustment	–
Profit before tax	1,182.9
Tax	288.1
Profit After Tax	894.8

 

1. Annual statement of Retained Earnings

 

Table 2: Summary of Statement of Retained Earnings

 

C$ in millions	Share capital	Contributed surplus-contributed	Hedges for cash flows	Adjustments for currency translation	Total comprehensive income (loss)- accumulated other	Earnings that were retained	Shareholders of Canadian Tire –equity attributed	Non-controlling interests-attributed equity	Equity Total
Balance  restated at  30th December 2018	591.5	2.9	92.0	(40.9)	51.1	3,473.8	4,119.3	1,048.7	5,168.0
Balance at  28th December ,2019	588.0	2.9	(28.3)	(101.6)	(129.9)	3,729.6	4,190.6	1,314.1	5,504.7

(Annual report, 2019)

 

 

1. Most Recent Balance Sheet

 

Table 3: Most Recent Balance Sheet summary

 

December 28,2019, as at	(C$ in millions)
ASSETS
Current assets	9,555.3
Non –current assets	9,963.0
Total assets	19,518.3
LIABILITIES
Current liabilities	5,751.4
Long-term liabilities	8,262.2
Total liabilities	14,013.6
Total  Shareholders’ equity	5,504.7
Total liabilities and shareholders’ equity	19,518.3

(Annual Report, 2019)

 

1. Annual Cash Flow Statement

 

Table 4: Annual Cash Flow Statement Summary

 

December 28th, 2019 –for the year ended	(C$ in millions)
Cash  from operating	1,087.6
Cash  for/from investing activities	(758.7)
Cash from financing activities	(604.2)
Cash generated during the year	(275.3)
Cash and cash equivalents at beginning of period	470.4
Cash and cash equivalents at end of year	195.1

(Annual Report, 2019)

 

1. Annual Financial Statements Notes

Financial statements notes are numbered as from 1 to 36 and cover various topics as described below.

• Operations and the company

Under this note the company discloses the nature of its business

• Basis of Preparation

This note provides the basis for preparation of the accounts

• Policies of accounting that were found to be significant

This note discloses accounting policies found adhered to

• Capital Management(Annual report, 2019)

 This note discloses the company’s capital management practices adhered to in order to meet its objectives.

• Financial Risk Management

Under this note, the risks of a financial nature are disclosed and mitigating strategies outlined

• Operating Segments

Under this note the operating segments of the business are disclosed

• Cash Equivalents and cash assets

Disclosed most liquid assets

• Receivables

Trade and other receivables are disclosed under this topic

• Loans Receivable

In this note the loans receivables are disclosed

• Other assets and receivables of a term nature

Other assets and receivables of a long term nature are disclosed.

• Intangible and Goodwill Assets

Intangible and goodwill assets are disclosed

• Investment Property

Items under investment property were disclosed in this note

• Property and Equipment

The items that fall under property and equipment and how they were treated were disclosed in this note

• Leases

All leases and how they were treated were disclosed in this note

• Subsidiaries

The company’s subsidiaries and current ownership were disclosed under this note

• Income Taxes

How the company determined its tax obligations and related matters were disclosed under this note

• Deposits

Types of deposits and how they were carried in the books of accounts were disclosed in this note

• Trade and Other Payables(Annual report, 2019)

This note disclosed trade and other payables and how they were determined and treated during the financial year

• Provisions

This note disclosed the provisions that were recognized by the company

• Contingencies

This note disclosed contingencies, how they were measured and determined

• Short-Term Borrowings

This note disclosed short-term borrowings and how they were measured and treated

• Loans

This note discloses the loans the company carried in its books, how they were measured and treated

• Long-Term Debt

This note disclosed long-term debt instruments and how they were treated during the year

• Non-current Liabilities-others

This note disclosed non-current liabilities-others

• Employment Benefits

This note disclosed employee benefits during the period and how they were treated

• Share Capital

This note disclosed share capital of the company and its various components

• Share-Based Payments

This note disclosed share-based payments components and how they were treated during the financial year

• Revenue

This note disclosed revenue of the company and its how it was measured

• Cost of goods sold

This note disclosed Cost of goods sold and its various components

• General Selling and Admin. Expenses

This note disclosed General Selling, and Admin Expenses

and their various components

• Finance Cost

This note disclosed finance cost and how they were measured

• Notes to the Cash Flows statement-consolidated

This note disclosed Notes to Cash Flows statement during the period and how they were treated

• Financial Instruments

This note disclosed net financial instruments and how they were measured

• Guarantees and Commitments

This note disclosed guarantees and commitments recognized during the year and how they were measured

• Related Parties

This note disclosed obligations to third parties and how they were measured

• Business Combination

This note disclosed business combinations that were performed during the year and how they were measured

 

1. List of the Members on the Board of Directors

• i). Eric T. Anderson
• ii). Martha G. Billes
• iii). Owen G. Billes
• iv). John A.F. Furlong
• v). Cynthia M. Trudell 
• vi). Norman Jaskolka 
• Claude L’Heureux
• Donald A. Murray
• ix). Michael Owens
• x). Mark E. Derbyshire
• xi). James L. Goodfellow
• Diana L. Chant
• Patrick J. Connolly
• David C. Court
• Greg Hicks
• Maureen J. Sabia  (Annual report, 2019)

1. The corporation’s external auditors and whether an unqualified audit opinion was given

The corporation’s external auditors are Deloitte LLP, Chartered Professional Accountants, Licensed Public Accountants.

 Unqualified opinion was given on the financial statements by the external auditors (Annual report, 2019).

1. Identification of ending date for the year

The year’s ending date is December 28^th

1. The method(s) of amortizing capital assets

Amortization is done on straight line method

1. The inventory cost flow assumption used (FIFO, Average cost, etc.)

The corporation estimates inventory at the value of inventory in the market and the historical cost after depreciating. Whichever figure is lower is picked.

1. Common shares as at 28^th December, 2019

Number of authorized and issued common stock was 3,423,366 (Annual report, 2019).

3. Ratio and Performance Analysis

  The ratio and performance analysis of Canadian Tire Corporation focused on profitability ratios, liquidity ratios and solvency ratios as shown in table 5, Table 6 and Table 7 below.

Table 5: Profitability ratio analysis for 2018 and 2019

		Ratio Formula	2018	2019
A	Profitability ratios
			C$ in millions	C$ in millions
	Revenues		14,058.70	14,534.40
	Cost of producing revenue		9,347.40	9,660.60
	Gross profit		4,711.30	4,873.80
1	Gross profit margin	(Gross profit/revenues)*100	33.51%	33.53%
	Net profit		783	894.8
2	Margin on Profit after tax (PAT)	(PAT/revenues)*100	5.57%	6.16%
	Shareholders’ equity		5,415.00	5,504.70
3	Return-On-Shareholders’ Equity	(PAT/ equity held for shareholders)*100	14.46%	16.26%
	Operating profit		1219.70	1449.70
4	Operating margin	(Operating profit/revenues)*100	8.68%	9.97%
	Cash from operations		807.40	1087.60
5	Margin on cash flows	(Cash from operations/revenue)*100	5.74%	7.48%

Profitability Ratios

Margin on gross profit, margin on net profit, margin on operating profit, margin on cash flows and return on shareholders investments for the corporation’s financial years ending December 28, 2018 and December 28, 2019.  Profitability ratios provide useful insights into the performance of a company and its overall wellbeing financially.  Margin on gross profit was the first ratio to be calculated (Öztürk & Serçemeli, 2016).  The margin on gross profit for Canadian Tire Corporation stood at 33.51% in 2018 and 33.53% in 2019.  The gross profit margin increased in 2019 compared to 2018. This shows that there was an improvement in business efficiency of core operations.  This shows that the company improved either its purchasing policies, or its sales promotion policies which saw it increase its gross profit margin (Maverick, 2018).   This is a positive development in the company’s business. The next profitability ratio used in the analysis is net profit margin. Canadian Tire Corporation’s net profit margin was 5.57% in 2018 and 6.16% in 2019.  This shows that the ratio improved in 2019 when compared to 2018 (Öztürk & Serçemeli, 2016). This ratio takes into account all expenses and costs incurred by a business to generate revenues during a financial year. It also measures the efficiency of management to control expenses to report a profit. The ratio shows that management was more efficient in 2019 when compared to 2018. This is a positive development as it shows the company’s management efficiency has improved. Return on shareholder’s investments/equity was analyzed next and it stood at 14.46% in 2018 and 16.26% in 2019. This shows that return on equity increased in 2019, This shows that stockholders are likely to get higher dividends in 2019 than in 2018 (Öztürk & Serçemeli, 2016). This ratio is likely to lead to a market price jump in the stock in the market. Operating margin also grew from 8.68% in 2018 to 9.97% in 2019.  This shows that the company is profitable on an operating level. The company is able to mitigate risks in its business to report profits.   Cash flow margin also grew from 5.74% in 2018 to 7.48% in 2019. This is a positive ratio as it indicates management will manage its working capital well to take up new opportunities in the target market (Prawirodipoero, Rahadi & Hidayat, 2019).

Liquidity Ratios

Table 6: Liquidity ratio analysis

			Ratio Formula	2018	2019
B		Liquidity ratios
		Current assets		9,255.80	9,555.30
		Current liabilities		5,258.20	5,751.40
1		Current-ratio of the company	Total current assets divided by the total current liabilities	1.76	1.66
		Merchandise Inventory		1997.50	2212.90
		Prepaid Expenses and Deposits		138.80	139.30
2		Acid-test- ratio	( Total Current assets-inventories on merchandise -prepayments)/ Total current liabilities	1.35	1.25
		Cash and cash equivalents		470.40	205.50
		Accounts receivable		933.30	938.30
		Marketable securities		183.70	201.70
3		The Quick-ratio	(Cash assets + Trade receivable + short term securities) / Total Current liabilities	0.30	0.23
4		The working capital ratio	Total current assets –Total current liabilities	3,997.60	3,803.90
5		The cash ratio	(Cash assets +  The Cash Equivalents) / Total Current Liabilities	0.09	0.04

The ability of an organization to pay its short term obligations using total current assets is what is called current ratio. Canadian Tire Corporation had a current ratio of 1.76 in 2018 and 1.66 in 2019 (Öztürk & Serçemeli, 2016). Even though the ratio fell marginally in 2019, the company was able to meet its current liabilities using its short term assets.  The general rule of 2:1 is what is accepted all over i.e. for every dollar owed, the company should at least have a minimum of 2 dollars in current assets to meet the short term obligations.  Next ratio analyzed is Acid test ratio (Zamora-ramírez & Morales-díaz, 2018). The acid test ratio for 2018 was 1.35 whereas in 2019 it fell to 1.26.  The ideal ratio is 1.0 and hence the company met the requirements for that.  The quick-ratio was 0.30 in 2018 and it fell to 0.23 in 2019.   The ability of the company to pay short term obligations without having to sell its inventory is tested by the ratio.  This is negative to potential investors as the ratio is low.  Working capital ratio indicates positive working capital balances throughout the two financial years (Tabash, 2018).  However, working capital reduced in 2019 when compared in 2018.  Cash ratio is the last ratio that was used to test the liquidity position of the company.  Cash ratio was 0.09 in 2018 which deteriorated further in 2019. Cash flow is very important in a company. There is need to look into it to ensure the cash position is positive (Zamora-ramírez & Morales-díaz, 2018).

Solvency Ratios

 

Table 7:  Solvency ratio analysis

 

C	Solvency ratio
	Total liabilities		11,871.80	14,013.60
1	Debt : equity ratio	(Current plus non-current liabilities)/ shareholders’ equity in total	2.19	2.55
	Total Assets		17286.80	19518.30
2	Equity ratio	Total equity/total assets	0.31	0.28
3	Debt ratio	Total liabilities/ total assets	0.69	0.72
	Total debt service costs		151.50	266.80
4	Interest-earned ratio	Operating profit/(interest plus principle)	8.05	5.43

 

 Solvency ratios were also used to assess the financial well-being of the corporation. The first ratio was debt to equity ratio which was 2.19 in 2018 and 2.55 in 2019. This implies the corporation borrowed more in 2019 when compared to 2018.   Total shareholders’ funds/equity ratio is yet another ratio 0.31 in 2018 and 0.29 in 2019. The ratio shows that a large percentage of the assets of the company are funded by debt providers (Öztürk & Serçemeli, 2016). This is not a good position as the company cannot withstand severe environmental turbulence.  The next ratio was ratio on obligations to financiers/debt.   The level of debt went up in 2019 than it did during the previous period. If there is sudden disruption in business conditions leading to significant drop in cash flows the company will be in trouble.  The ability to meet loan obligations is measured by debt ratio. The ratio fell from 8.05 times in 2018 to 5.43 times in 2019. It appears the client took on more debt.  The ratio is still positive.  This implies that whenever the amount borrowed is demanded, the corporation can settle the demanded amount fully (Öztürk & Serçemeli, 2016).

4. Cash Flow Analysis

 Cash flow statement as at December 28, 2019, shows that the company generated positive cash flows from operations. This was mainly because the company made a profit during the year. The company has a large number of depreciable assets which saw the depreciation expense being added back into net profits.  The company used a large portion of its revenues to pay income taxes. This is advisable as the company will not face challenges obtaining operating licenses as paying taxes makes it a good corporate citizen (Arnold, Ellis & Krishnan, 2018). It will be easier to obtain social license since it pays taxes. The company used a large portion of its operating cash flows to meet its interest expense.  This shows that the company is highly leveraged. In the event of unfavorable conditions in the operating environment, it may find it difficult to sustain its current interest payments (Huang & Wang, 2017).

            The company used a lot of cash in its investing activities. The company used substantial amount of funds to invest in property and equipment as well as investment property.  The company also used funds to invest in intangible assets.  Money was also spent in business combinations. The company funded its investments from funds realized from selling some of its investments held in the short term period(Arnold, Ellis & Krishnan, 2018).  This is a positive thing as it means that management is confident on the future prospects of the company otherwise they would not have invested as they did.  In short, the investing section of the cash flows shows that the company invested heavily in its business in 2019(Arnold, Ellis & Krishnan, 2018).

In its financing activities, the company paid dividends of C$242.5 million to stockholders and C$84.1 million to non-controlling interests. This will ensure stockholders are supportive of the company’s policies and programs. If the company intends to raise new capital to finance expansion from investors it won’t face any challenges (Arnold, Ellis & Krishnan, 2018).  The company also made huge payments to its financiers for loans it had taken.  The company also used a large portion of funds to repurchase share capital. This is important as it gives existing stakeholders more control which then improves decision making.  The company will improve on decision making due to fewer investors than before (Arnold, Ellis & Krishnan, 2018). The company also received new loan funds which were used in the investing category which was expected to enhance revenues.   The company used a lot of cash to create new assets which are expected to enhance existing cash flows in future. It appears that the company undertook a major investment in 2019 as the amount used was substantial.  As an investor, I would be concerned with the new loans taken, what was the purpose and why there seems to be a rush in making new investments. The company was able to receive substantial funds from financiers which implies that it maintains a good reputation with them (Arnold, Ellis & Krishnan, 2018)

5. Overall Conclusion of Financial Performance Analysis and whether I would invest in it

Canada Tire Corporation has a strong financial base.  The company is profitable judging from the analysis on ratios on profitability. The company has been making a return to stockholders and it is a good dividend payer. The company is liquid as it has sufficient working capital and does not need borrow to finance its business operations and expansion activities. The company debt facilities are within its ability to service as its debt service cover ratio is 5.43 times implying that its able to pay existing finance costs 5.43 times. The company has a positive current ratio and its solvency ratios show that it is stable.  The company can pay off its debts using the short term resources it holds. It is evident the company invested in enhancing capacity or expanding the business in the last year.  Management and board have faith in the company’s future prospects. This is because they undertook a share repurchase. This implies that in future shares will be concentrated in fewer hands. This will force the market price up due to the forces of supply and demand. Those who will be still holding these shares will receive a better return. 

As to whether I can invest in the company, the answer is a strong” Yes”. The company is obviously well managed. Management efficiency is attested by the strong performance during the year.  The share repurchase scheme could see appreciation in the price of shares as more hands will be chasing fewer shares. The company invested heavily in acquiring new assets to enhance capacity and grow revenues. Management is efficient judging by the growing ratios. The company is also a good payer of dividends.