Question

Chet Inc. is a small manufacturer of Muskoka chairs. The company has been in business for 25 years and is a privately owned family business. Chet Inc. has approached your bank for a new bank loan. The bank that has been providing the existing line of credit up to this point has given 60 days notice for Chet to repay the outstanding amount. Chet needs the financing from your bank to provide cash for working capital purposes and for general corporate needs. Chet has asked you for a line of credit up to $450,000. You have been provided with the following financial statement information about Chet Inc. (all amounts included the notes are in thousands of dollars):

Chet Inc.

Balance Sheets as of December 31,

(000)

2017 2016 2015

Cash $25 $85 $125

Accounts receivable 325 305 275

Inventory 613 470 360

Prepaids 95 72 80

Property, plant, and equipment 1,520 1,350 1,000

Accumulated depreciation (725) (625) (500)

Goodwill 170 300 300

Total assets $2,023 $1,957 $1,640

Bank loan $127 $266 $250

Accounts payable 300 245 195

Unearned revenue 50 45 35

Long-term debt 798 660 450

Common shares 175 100 100

Retained earnings 573 641 610

Total liabilities and shareholders' equity $2,023 $1,957 $1,640

Chet Inc. Income Statements for the year ended December 31, (000’s)

2017 2016 2015

Revenue $2,950 $2,475 $2,250

Cost of goods sold 1,977 1,621 1,440

Selling, general, and admin expense 693 545 563

Depreciation expense 145 150 100

Interest expense 72 56 36

Gain on sale of property, plant, and equipment (75) (10) 0

Income tax expense 2 23 22

Net income $136 $90 $89

Cash from operations $90 $68 $63

Weighted-average number of shares outstanding during the year 42,500 40,000 40,000

Extracts from the notes to the financial statements;  $200 of the long-term debt must be repaid in 2018

Required:

Use the information in the financial statements of Chet Inc. to calculate the following for 2016 and 2017.

a) Earnings per share

b) Return on equity

c) Return on assets

d) Debt-to-equity ratio

Answer 1