Business Financial Performance of the Company - Report Example

To The CEO, Goodyear Tire & Rubber Company 15 July Business Financial Performance of the Company From : Company Analyst Enclosed is my report on the financial performance of our company. My key findings are as follows: 1. In the company’s annual report of 2009, many of the data did not benefit audit from our independent auditor. In particular, I am referring to page 95 of the report plus other financial data from the same report. This is unacceptable because sound analysis of our operation and planning our next steps depend so much on a reliable financial data. Further, sustainable investment inflows into our company will only materialize if the public trust our reports. Unfortunately, the public will only trust our reports if we are transparent and if our data benefit from external audit. 2. Our losses in 2008 have continued in 2009. This is reflected in three key indicators of profitability: return on assets, return on equity, and gross profit margin. It is not even the case where our profitability is not enough to offset opportunity costs. Our losses are in the high negatives: return on assets is at -0.025, return on equity is at -0.369, and gross profit margin is -0.0219. 3. Our other figures will not encourage investment inflows to our company: our debt-equity and debt ratios are high. The former is about 5.8 while the latter is at 0.93. Our quick ratio at 1.1678 is very low for comfort. 4. While inventory turnover is mediocre at 5.5980, our total assets turnover is too low at 1.1125 making us highly vulnerable even to short term volatilities in the market. 5. The financial difficulties that the company is feeling today are probably not only the result of the ongoing crisis in the US economy. We are in the high negatives even in 2008. In view of the above, my recommendations are as follows: 1. Focus on profitability policies. Formulate ways and means to reduce costs and increase sales. We must be profitable even in a downturn. At the same time, our lack of profitability this 2009 is not simply the result of a crisis market. We are in the negatives even in 2008. 2. We must reassess our strategic position both in the economy and in the market. We must find out how our competitors are performing and find out if our difficulties are also true for the industry or are only true for our company. 3. Promote public trust in our company, ensure that all data in our annual reports merited independent party audit. This measure is important given the uncertainties in the economy, in the industry, and in our position in the market. I. Background on financial ratios This report examined the financial condition of our company based on the company’s annual report in 2009. The company report is available at the company website. The financial analysis focused on the following ratios: return on assets, return on equity, gross profit margin, debt/equity ratio, debt ratio, current ratio, quick ratio, inventory turnover, total assets turnover, and price earnings ratio. To facilitate review and understanding of the analysis, this report restates the definitions of Ross et al. (2003) and Reilly & Brown (2003). Based on Ross et al. (2003, p. 70), return on assets (ROA) can be defined in several ways but the most common way is for the ratio to be defined as . Based on Ross et al. (2003, p. 70), return on equity (ROE) is usually measured as . Based on Reilly & Brown (2003, p. 329), gross profit margin is . This is computed before taxes. Based on Ross et al. (2003, p. 66), debt/equity ratio also known as the debt-equity ratio, refers to . Based on Ross et al. (2003, p. 72) , the debt ratio computed as: . Based on Ross et al. (2003, p. 65), current ratio is estimated as: . Based on Ross et al. (2003, p. 65), quick ratio is computed as: . Based on Ross et al. (2003, p. 65), inventory turnover is computed as: . Based on Ross et al. (2003, p. 69), total assets turnover can be solved through: Given the reporting system of the company, the sales data is obtained from net sales. Based on Ross et. al. (2003, p. 71), the price-earnings ratio or the PE ratio is . In this report, the PE ratio is computed both at the lowest and highest price of the stock which $3.17 to $8.84 in 2009 with an earnings per share of -$1.55 as recorded by the company’s unaudited financial report. Unfortunately, the company used an unaudited financial report for its annual report in 2009. Thus, there is a possibility that some of our computations of the financial ratios may not be reflecting the true situation. A possible solution to this situation, therefore, is to treat the financial ratios computed by this report as indicative, especially because our independent auditor has made a statement that some of the financial figures in the annual report fairly reflect the company’s financial operation. II. Financial Ratio Computations Using the formulas of the earlier section, our computations for the financial ratios are as follows: Ratios Value in 2009 Return on assets -(364/14,410) = -0.0253 Return on equity -(364/986) = -0.3692 Gross profit margin (-357/16,301) = -0.0219 Debt-equity ratio (114+4,182)/735 = 5.8449 Debt ratio ((14,410-986)/14,410) = 0.9316 Current ratio (7,225/4,095) = 1.7643 Quick ratio ((7,225-2,443)/4,095) = 1.1678 Inventory turnover (13,676/2,443) = 5.5980 Total assets turnover (16,301/14,410) = 1.1125 Price-earnings ratio 3.7/(-1.55) to 8.84/(-1.55) = -2.3871 to -5.7032 In summary, all figures do not speak well of the company’s operations. The company is losing, debt in relation to equity is high, assets turnover is low, and the price-earning ratio of our stock is highly unattractive. There is no indication in the financial ratios that the situation will improve. Of course, an alternative to financial analysis based on ratios is to conduct a horizontal analysis of the financial statements along a longer horizon. It is possible that we discover a market seasonality in our figures and that the figures we are seeing are part of a business cycle. Bibliography Brealey, R. and Meyers, S. (2003). Principles of corporate finance. 7th ed. The McGraw-Hill Companies. Goodyear Tire & Rubber Company. (2010). 2009 Annual Report. Ohio: Goodyear Tire & Rubber Company. Retrieved July 15, 2010, from http://www.goodyear.com/investor/pdf/ar/2009ar.pdf Reilly, F. and Brown, K., (2003). 7th ed. Investment analysis and portfolio management. Cincinnati: South-Western. Ross, S., Westerfield, R., and Jordan, D. (2003). Fundamentals of corporate finance. 6th ed. McGraw-Hill/Irwin. White, G., Sondhi, A., and Fred, D. (1998). The analysis and use of financial statements. New York & Bribane: John Wiley & Sons, Inc. Annex 1. Source: The Goodyear Tire & Rubber Company (2010) Annex 2. Source: The Goodyear Tire & Rubber Company (2010) Read More