I will be conducing a leverage-debt ratio. A leverage debt ratio is used to measure the degree to which a firm relies on borrowed funds in its day to day operations. Conclusively, a firm that takes too much debt could experience problems repaying lenders or meeting their promises to shareholders. The ratio measures to what extent the company is financed by borrowed funds that must be repaid. Per the financial statement of Canadian Tire, specifically the balance sheet Canadian Tire’s total liabilities equaled $8922.4 in 2015 and increased in 2016 with $9198.1. On the flip side, Canadian Tire’s owner equity equaled to $5630.8 in 2015, and increased to $5789.7 in 2016. To calculate, we take the total liabilities and divide it by the owner’s equity.
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Well it is a sign that Canadian Tire is not too dependent on their lenders to run their business. A number over 100% shows the firm has more debt than equity, and although this is the case it has been consistent for 2 years. Implying that they are not increasing their loans or decreasing, rather staying constant. This can prove both positive and negative to potential investors. For example, an investor can say “Canadian Tire is doing nothing to solve their loans”. Or “Canadian Tire is growing, and thus their loans will increase due to the increased amounts of revenue they are gaining from their customers”. When comparing other industries leverage-debt ratios, I saw that Walmart had 156% in 2015. Which is right in line with Canadian Tire’s 158%. Meaning that these two industry competitive retailers follow a common norm in which their ratio is between 1 and 2. Being within 1 means the company finds its projects with a slightly greater emphasis on debt and less equity. The goal is to not be above 2, as that is when a company borrows a lot to finance their operations, meaning creditors have twice as much money in the company as do equity holders. Since Canadian Tire is under 2, it has less exposure to economic interest rate increase and changes in credit conditions. Although, equity is increasing from 2015- 2016 that is a good sign for Canadian Tire to be competitive in the challenging industry. With that there are bound to be increased liabilities which have
Well it is a sign that Canadian Tire is not too dependent on their lenders to run their business. A number over 100% shows the firm has more debt than equity, and although this is the case it has been consistent for 2 years. Implying that they are not increasing their loans or decreasing, rather staying constant. This can prove both positive and negative to potential investors. For example, an investor can say “Canadian Tire is doing nothing to solve their loans”. Or “Canadian Tire is growing, and thus their loans will increase due to the increased amounts of revenue they are gaining from their customers”. When comparing other industries leverage-debt ratios, I saw that Walmart had 156% in 2015. Which is right in line with Canadian Tire’s 158%. Meaning that these two industry competitive retailers follow a common norm in which their ratio is between 1 and 2. Being within 1 means the company finds its projects with a slightly greater emphasis on debt and less equity. The goal is to not be above 2, as that is when a company borrows a lot to finance their operations, meaning creditors have twice as much money in the company as do equity holders. Since Canadian Tire is under 2, it has less exposure to economic interest rate increase and changes in credit conditions. Although, equity is increasing from 2015- 2016 that is a good sign for Canadian Tire to be competitive in the challenging industry. With that there are bound to be increased liabilities which have