Answer a.)
According to the balance sheet of Clearwater Seafoods from the audited financial statement of 2015, the current asset is 211,237,000 Canadian Dollar, and Current liabilities are 167,631,000 Canadian Dollar in the year 2015. The calculation of liquidity is carried out as below.
Calculation of Liquidity
Figures in thousands,
Observation:
It was found that both the current ratio and quick ratios decreased from the preceding year showing that the liquidity of the company has declined from the previous year. Also, it can be seen that the current ratio is less than 1.5 in the year 2015. In a similar way, we can see that the quick ratio has fallen by 31.33%, which is even more than current ratio and the quick ratio for the year 2015 is even less than 1. We can see that the inventory has increased by 62% more while the current liability seems to have increased by 96.7%.
Conclusion:
The observation gives multiple probabilities. The company might not be making enough sales due to some reasons like decrease in the demand or rise of the competitor. The probability is that the inventories could have been stacked beyond the capacity of the company. The third reason could be increase in the payables due to multiple reasons like need to extra space for increase in inventory, or increase in long term debt or any other reasons.
Answer j.)
If I was given choice, I would definitely not invest in the long-term debt as from conclusion drawn above, there is high probability that the company has already increased its long-term debt and hence the investment in long term debt could be riskier in case of default. Besides, the company’s profitability is negative for the year 2015 indicating it has not been able to provide leverage to the poor performance of the company. Unless the company brings out new strategy like lean operation method or new marketing strategy that increases its sales, I don’t think investing in long term debt is a good idea of investment.
