Question

Connor Ltd. is a large private company owned by the Connor family. It operates a manufacturing business in northern Ontario. It has applied to the ICB bank for a new loan of $100 million to expand its manufacturing facilities.

You are a financial analyst with ICB. You have just been given an assignment to analyze Connor’s Year 7 financial statements and to identify any concerns about Connor’s performance and financial condition.

The following are financial statements for Connor Ltd. for Year 7:

BALANCE SHEETS (In 000s)
	Year 7			Year 6
Asset
Cash	$	13,000		$	34,000
Accounts receivable		209,000			198,000
Inventory		326,000			316,000
Property, plant and equipment		308,000			266,000
	$	856,000		$	814,000
Liabilities and Shareholders’ Equity
Accounts payable	$	206,000		$	212,600
Other accrued liabilities		68,000			56,400
Bonds payable		196,000			196,000
Common shares		174,000			186,000
Retained earnings		212,000			171,000
	$	856,000		$	822,000

INCOME STATEMENT (In 000s)
	Year 7				Year 6
Sales	$	1,940,000			$	1,890,000
Cost of goods sold		(1,366,000	)			(1,286,000	)
Gross margin		574,000				604,000
Depreciation expense		(46,000	)			(40,000	)
Other expenses		(412,000	)			(431,000	)
Income tax expense		(62,000	)			(69,000	)
Net income	$	54,000			$	64,000

Additional Information

• Connor uses the straight-line method when depreciating its property, plant, and equipment.

• Interest expense was $10,000 for Year 6 and Year 7.

(c) Calculate the current ratio, debt-to-equity ratio, return on assets, and return on equity for both Year 7 and Year 6. (Round the final answers for all the ratios to two decimal places. Omit $ sign in your response.)

	Year 7			Year 6
	$			$
Current ratio		=			=
	$			$
	$			$
Debt to equity		=			=
	$			$
	$			$
Return on assets		=	%		=	%
	$			$
	$			$
Return on equity		=	%		=	%
	$			$

(d) Determine whether Connor’s liquidity, solvency, and profitability have improved or deteriorated from Year 6 to Year 7.

Liquidity	(Click to select)  Deteriorated  Improved  Remains the same
Solvency	(Click to select)  Deteriorated  Improved  Remains the same
Profitability	(Click to select)  Deteriorated  Improved  Remains the same

Answer 1

CONNOR LTD

Ratio Analysis :

		Formula	Year 7	Year 6	Trend
1	Current ratio	Current assets/ Current liabilities	(13,000+209,000+326,000)/(206,000+68,000) 548,000/274,000 = 2:1	(34,000+198,000+316,000)/(212,600+56,400) 548,000/272,400 = 2.01:1	Slightly decreasing (more like same)
2	Debt to equity	Debt / Equity	(206,000+68,000+196,000)/(174,000+212,000) 470,000/386,000 = 1.22 times	(212,600+56,400+196,000)/(186,000+171,000) 465,000/357,000 = 1.30 times	Slightly decreasing
3	Return on Assets	Net income / Total Assets	54,000/856,000 = 6.31%	64,000/814,000 = 7.86%	Decreasing
4	Return on Equity	Net income / Equity	54,000/386,000 =13.99%	64,000/357,000 = 17.93%	Decreasing

Liquidity ratio, Solvency ratios and Profitability are in decreasing trend from year 7 to year 6.