The Dynamics of Goodyears Financial Performance - Research Paper Example

PROFITABILITY - GOODYEAR TIRE & RUBBER CO (GT) Return on Assets Industry Comparison 3.16% Return on Equity Industry Comparison -10.64% Return on Capital Industry Comparison 7.69% MARGIN ANALYSIS - GOODYEAR TIRE & RUBBER CO (GT) Gross Margin Industry Comparison 18.04% Levered Free Cash Flow Margin Industry Comparison 2.12% EBITDA Margin Industry Comparison 7.50% SG&A Margin Industry Comparison 14.01% ASSET TURNOVER - GOODYEAR TIRE & RUBBER CO (GT) Total Assets Turnover Industry Comparison 1.3x Accounts Receivables Turnover Industry Comparison 7.2x Fixed Assets Turnover Industry Comparison 3.1x Inventory Turnover Industry Comparison 5.7x CREDIT RATIOS - GOODYEAR TIRE & RUBBER CO (GT) Current Ratio Industry Comparison 1.5x Quick Ratio Industry Comparison 0.9x LONG-TERM SOLVENCY - GOODYEAR TIRE & RUBBER CO (GT) Total Debt/Equity Industry Comparison 315.3x Total Liabilities/Total Assets Industry Comparison 90.4x GROWTH OVER PRIOR YEAR - GOODYEAR TIRE & RUBBER CO (GT) Total Revenue Industry Comparison 15.53% Tangible Book Value Industry Comparison 48.15% EBITDA Industry Comparison 56.89% Gross Profit Industry Comparison 27.36% Receivables Industry Comparison 8.03% Inventory Industry Comparison 21.86% Diluted EPS Before Extra Industry Comparison -42.58% Capital Expenditures Industry Comparison 26.54% Cash From Ops. Industry Comparison -28.76% Levered Free Cash Flow Industry Comparison -51.20% Latest 12 Months Data Items Latest Full Context Quarter Ending Date 2010/12 Gross Profit Margin 21.6% EBIT Margin 1.7% EBITDA Margin 7.6% Pre-Tax Profit Margin 0.0% Interest Coverage 0.9 Current Ratio 1.5 Quick Ratio 0.9 Leverage Ratio 24.3 Receivables Turnover 7.1 Inventory Turnover 5.5 Asset Turnover 1.3 Revenue to Assets 1.2 Return on Invested Capital -4.4% Return on Assets -1.4% Debt/Common Equity Ratio 6.71 Price/Book Ratio (Price/Equity) 5.60 Book Value per Share $2.65 Total Debt/ Equity 7.37 Long-Term Debt to Total Capital 0.87 SG&A as % of Revenue 14.0% R&D as % of Revenue 0.0% Receivables per Day Sales $52.30 Days CGS in Inventory 66 Working Capital per Share $11.27 Cash per Share $8.25 Cash Flow per Share $1.91 Free Cash Flow per Share $0.21 Tangible Book Value per Share $-0.82 Price/Cash Flow Ratio 7.8 Price/Free Cash Flow Ratio 72.1 Price/Tangible Book Ratio -18.03 Most recent data    5-Year Averages Return on Assets -0.5% Return on Invested Capital -1.4% Gross Profit Margin 20.8% Pre-Tax Profit Margin 0.1% Post-Tax Profit Margin -0.9% Net Profit Margin (Total Operations) -0.4% R&D as a % of Sales 0.0% SG&A as a % of Sales 13.8% Debt/Equity Ratio 5.24 Total Debt/Equity Ratio 5.83 Price Earnings Ratios P/E Ratio 26 Weeks Ago 17.9 12 Month Normalized P/E Ratio 150.1 GT Ratios & Returns Price-to-sales 0.2 Return on Equity 0.0 Operating Margin 7.6 Profit Margin -1.1% More GT Ratios & Returns > GT Financials Sales $18.832 bil Profits $-0.216 bil Assets $15.63 bil Employees 72000.0 ANALYSIS Goodyear is a prestigious company that has dominated the market by producing tire, rubber, and glass products. Recently, the company has recorded profits of $16,302 million at the fiscal year of 2009. This was a disappointing figure considering the fact that the company has a revenue increase of 16% in 2009. The net loss for the company was $375 million, compared to last year which was only around $77 million. Hence, the company’s revenue stream was declined 16% from last year. The company’s financial ratios no doubt indicate that the company is facing tough times. For instance, the net loss in their operations is a drastic $375 million. This type of deficit will not enable the company to thrive in these harsh economic times. Furthermore, the company’s earnings per share is extremely low, which raises the questions for the stockholders. The return on investment capital is -1.4%, which means that the company has low funds to buy fixed assets. The price/tangible book ratio is -18.03, which means the stock is undervalued. The company must need to address this issue immediately in order for the company to be marginal. In my opinion, Goodyear Tire and Rubber is a very mediocre investment. The stock price is plagued with low earnings per share yet the organization is involved in a very stable market. The gross profit margin is 21.6%, which is very hefty. Goodyear continues to diversify in other countries, which tremendously help its cause. The current stock price is up by 0.31cents. Instead of buying the stock, I would recommend to hold the stock. The company has diversified its profits by being the number one company for supplying tires. From a financial standpoint, the investor should be hesitant about buying the stock. The net profit margin is in negatives and although the company shows some promising signs of boosting the stock price; it is not very certain that the stock price will continue to rise. Recommendation of a strategy to improve return on equity, at an acceptable level of risk. Identify your company’s optimal capital structure.  One of the strategies that the company can implement is a stock-split. All companies possess a number of shares that are outstanding in market. A stock split enables the company’s board of directors to enhance the number of shares. In essence, in a 2-for-1 stock split enables a company to give a shareholder an additional share with the current stock. The stock’s price no doubt affects the stock price. After the split, the stock price declines however the number of shares in the market increases. Although the primary goal of the stock split is to make the shares more affordable for investors, which boosts the price of the stock after the split as it enables individuals to buy the stock and tremendously enhancing the demand for it. Lastly, a stock split gives confidence to the investor that the company will continue to flourish in the future. Although this case might not always be true, investors are still buying the stock because of the affordability factor. The company’s optimal capital structure refers to the weighted-average cost of capital. Hence, it boosts the firm’s stock, yet does not fully boost the earnings per share. The primary motive of the organization is to have an appropriate estimation for the unleveraged rate of return in its market. Goodyear acknowledges the WACC is 15% and its average leverage ratio of 40%. So what does this figures depict? Well, in essence the company must have a higher WACC in order to compete with the market. Since the WACC takes cost of debt, cost of equity and long term debt in account, Goodyear must drastically improve on this figure if it wants to compete in long-term. Include in your analysis, what where the early indications of financial trouble, and what could have been done to avert the problems.  Financial troubles have plagued the organization in many ways. First and foremost, the company is in debt as it had to invest $360 million in a fund that worsened the conditions. Economic crisis have not helped the condition. Furthermore, a jury in North Carolina has recently ruled in a lawsuit in a favor of the plaintiff who was suing the company. The plaintiff is demanding for $1.5 million in punitive damages, but the judge only awarded the plaintiff of $450,000. Without a doubt, a lawsuit is going to damage the overall net income of the company in a major manner. Moreover, the company is cutting jobs as it laid 5000 employees and no doubt the company is accumulating loans to pay off its current debts. Although the company has made some improvements, it is not sufficient to right the company into a right direction. To make matters worse, the cost of raw materials has been steadily increasing as inflation has hit the economies hard. The company has cut jobs in order to invest more on raw materials. However, it does not diminish the fact that cost of raw materials has increased the overall unit price of the products. Consumers in this economy are always making economic decisions that accommodate their personal needs. Clearly, price is an issue that consumers examine carefully. Other generic tire manufacturers have low prices on their products which is detriment to Goodyear. With Another financial problem that is plaguing the company is inventory. Reducing inventory costs is one of the focal main points that the company needs to address. Goodyear has made impressive attempt to reduce their inventory by more than $500 million two years ago, but has failed to keep that figure more than $300 million below the prior year. In order to solve their issues, Goodyear must protect its brand equity. It must do so by producing high-quality products and testing them in such a manner that they are failure-proof. In order to gain customer satisfaction, the company must give consumers confidence that they can buy their products. If the company is able to implement that type of attitude and culture in their company, it will be able to solidify its brand equity. As far as reducing inventory costs are concerned, that will be a major challenge. In essence, each store must define the bottom line of inventory of products. Each store must analyze and study inventory comprehensively in an efficient method so inventory can be reduced by at least 25%. For instance, during the cold, harsh winters of December, it seems logical to hold more inventory rather than in summer or fall weather. Eliminating existing inventory can tremendously impact carrying costs. Using FIFO method (first-in-first-out), managers can ensure that excess inventory is not remaining as on obstacle towards cash flow. If both the main corporation and its affiliates are able to instill this strategy, the company will not have drastic loss in inventory loss. Lastly, the company must allocate its resources in an effective manner. The company made the right decision by cutting its work force and reducing its payroll debt. Now, it must effectively pursue heavily in Research and Development in order to develop innovative products. If it is able to produce unique type of tires that attract a large customer base, it will be able to no doubt be the leader in sales. Recently, Goodyear introduced the first aviation tire that were made of aluminum core. What is your assessment of the company’s financial position today?  As of now, Goodyear is slowly making its way back to penetrate the market niche. According to Yahoofianance.com, Goodyear had a market cap of $3711 million. It is an impressive figure to be accounted for but does not diminish the fact that the firm’s liabilities continue to be a challenge for the corporation itself. While the company does have a strong brand protection and operates internationally, it does struggle with its financials. Moreover, the drastic modifications in raw materials prices continue to be a major challenge for an organization. It has failed to maintain its sales against competition recently as Titan Corporation bought $98.6 million worth of assets of Goodyear in Europe. The company continues to lack any credibility in the future and will tough economic times plaguing the nation; it is not very clear how Goodyear will respond. Do you predict that the company will survive and prosper?  Goodyear Corporation needs to make drastic changes in order to get back on tract. The company will survive in these turbulent times; however, it will not prosper fully. According to Forbes.com recently, the company was ranked as Number One US Company. The company does have a strong market position and brand equity will hopefully allow the company to gain more customer base. If Goodyear wishes to prosper in this rough economic recession; it must do so by eliminating its short and long-term debts. Moreover, the company has to turn its profit margin of -1.1% into at least something positive. Goodyear will only continue to be marginal at best since many automakers will depend on the company for its products. However, the company will never reach optimal levels of prosperity since it cannot manage its costs well. Furthermore, the company must be able to diversify its revenue streams through many channels. If it fails to be effective and productive in United States, it must make some sort of market impact in Europe, Asia, and other parts of the world. 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