Financial performance of Canadian Tire and in making investment decisions

Financial performance of Canadian Tire and in making investment decisions

Question 1

ROE = 

Annual Net Income

Average Stockholders' Equity

ROE 2011 = 467/(4067+4409)/2

= 11.01

ROE 2012 = 499/(4409+4764)/2

= 10.88

Profit margin

Profit margin 2011 = 4.50

Profit Margin 2012 = 4.37

Account receivable turnover

Account receivable turnover = Net credit sales/Average accounts receivables

Account receivable turnover = 13.93

Account receivable turnover =14.53

Debt to equity ratio

Debt to equity = total liabilities/ shareholders equity

Debt to equity ratio 2011 = 0.53

Debt to equity ratio 2012 = 0.49

Price to earnings ratio

P/E ratio 2011 = 53.03/5.71

= 9.28

P/E ratio 2012 = 59.01/6.10

= 9.67

Explanation

There is no denying the fact that Canadian tire is a well-known retail operator and seller of automobile products across Canada, and over the years company has able to develop a niche for itself in national market. The phenomenal performance of the company during the last two years is evident from the calculated ratio, for instance, ROE of 11.01and 10.88 during 2012 and 2011 explains that company is successful in generating quick and large profit from new investment and has the potential of satisfying the needs of shareholders.

Moving forward, during the year 2011-2012 company has able to maintain a steady net profit margin between 4.37-4.59, which means that it has able to convert 5 percent of its total sales into profit(Canadian Tire, 2012). This percentage is quite low from preceding years, but according to reports, it is only because of poor economic condition, however, management of the company is optimistic of raising its net profit margin to around 20 percent in next 5 years.

Efficiency level of Canadian tire is realized from the fact that despite of poor economic condition it has able to maintain its receivable turnover ratio to around 14 days from the sales of product or rendering of services. Moreover, low debt to equity ratio of 0.53 and 0.49 during 2011-2012 indicates that company financial position is very strong and is in a good position to satisfy the needs of its shareholders. Thus, after reviewing the investment indicators it could be concluded that Canadian tire is the best place to invest from any shareholder

Question 2: Cost of capital of the company

CAPM = Rf+ B(Rm-RF)

Cost of capital = 0.06 + 0.68(0.04)

Cost of capital = 8.72%

Firm and economic specific risk

Despite of company excellent financial position and performance, it is imperative for the investor to conduct in-depth analyses on certain firm ...