Financial Ratio Analysis:Breathe EZ Inc.

Breathe EZ Inc. is a small manufacturer of home environmental products such as humidifiers, air cleaners, and ionizers.IDI's products are sold across Canada and about 20% of its sales are outside Canada, mainly in the USA.The president of Breathe EZ feels that the company has a good product and established markets, and has performed well over the past few years.He is concerned, however, that Breathe EZ is tight on cash.He has approached your organization for a significant loan to provide the company with additional working capital, as well as to purchase capital assets that need to be replaced.The president of Breathe EZ has provided the attached income statements and balance sheets for recent years.

In your discussions with the president you learn the following additional details:

1.The long term debt is due to be repaid in 2019.The amount is owed to a large bank and is secured against certain capital assets.

2.Breathe EZ has a $200,000 line of credit available from its bank.Currently the company has used $190,000 of its borrowing capacity.

3.All sales to customers and purchases of inventory are made on credit and do not have to be paid for at least 30 days.

4.Interest expense is included in selling, general and administrative expenses.Interest expense was $60,000 in 2018, $100,000 in 2017 and $46,000 in 2016.

5.Industry average ratios are as follows:

a.Current1.90

b.Gross profit50%

c.Quick1.00

d.Return on Sales2.5%

e.Debt/Equity1.00

f.Debt/Total Assets0.60

g.Return on Assets0.80

h.Return on Equity6.00%

i.Times interest earned3.5 times

A copy of the Company's Financial Statements are provided on the next page.