HIGH PERFORMANCE TIRES

Dr Ashish Varma Ph.D, FICWA, PGDM Assistant Prof IMT Gzb 2012

1952
The Beginning

A Retail Tire Chain Formed by HARRY & EDNA WALLACE.

1960s

Late

Family Owned Business

Passed the business to their Daughter JANE WALLACE.

Efficient Management & Interpersonal Skills Lead the firm to growth & stability

2001
Family Business (II) & The Downturn
At Age of 64, Passed on the business to her Son WILLAM WILLACE. By 2004 HTP was having difficulties

William Wallace
MBA with double concentration in Marketing & Finance

Carefree & Privileged life Impatient Disorganized & Poor Planner

Williams Tenure

Failed Expansion Plan Loosing Experienced Staff Low Quality Raw Materials Faulty Accounting System
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Williams Tenure (Failed Expansion Plan)

Action
Put a major Expansion Plan
Expand the number of retail outlet in smaller community Diversify the products & Service

Effect
Increased Customer Dissatisfaction
Long Waiting Periods for fluid change Prior Appointment Required

Reputation of Unskilled mechanics.

Automotive Maintenance Fluid Change Service Tune Ups Alignment Battery Brakes

PR takes a beating Couldnt compete with local service station in smaller community

Number of Damage cases Forced by court to pay the claims.

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Williams Tenure (Loosing Experienced Staff)

Action
Cut down the Wages & Benefits to increase profitability. Commission to sales staff as per sales volume

Effect
Experienced & loyal professional left.
Replaced by inexperienced & young staff New staff have poor customer service skills

Commission lead to highly aggressive practice that alienated customers

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Williams Tenure (Low Quality Raw Materials)

Actions
Started Buying NO NAME tiers from overseas suppliers to increase profit.
Initially Generated High Profit

Effect
Quality Concerns
Shorter Thread Life Blowouts

Sales margin Falls

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Williams Tenure (Faulty Accounting System)

Actions
A accounting system was purchased in 2002 to automate general accounting Choose a low cost vendor

Effect
Poor S/W installation & training.
Clerical Staff Struggled. Worsen due to high employee turnover.

Lot of overtime to clear data backlog. Customers & suppliers were alienated over delays & errors

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Early 2003
Jane Wallace Steps IN
Suspended all dividends payment. Hired JENNY CHEN, (CA, CFA, CMC) From accounting firm of Dexter, Mathew & Jones

Jenny Chens Challenge

Prepare a operation review. Analyze why things deteriorated so much. How to improve operations. Recommend Future management

Financial Situation

$600,000 Line of Credit

Separate term loans & mortgages to finance its capital purchase Retail Sales by cash & Credit card. Slowdown in local Economy

Can be extended depending on loanable funds & companys financial condition. Must Maintain Current Ratio of 1.5 Times interest earned ratio of 5.0 Can borrow up to 50% of A/R + Inventory

Forest Fire in 2003 summer Collapse of Canadian Beef Industry

Cash Flow Ratio Analysis

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

ROE Analysis Balance Sheet(CS)

Case Analysis & Findings

Liquidity Asset Management Long Term Debt Paying Ability Profitability
Cash Flow Ratio Analysis ROE Analysis Balance Sheet(CS)

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

Liquidity
Current

Ratio is below the Loan Requirement

Excessive Inventory Stretching of payables Cash Requirement for Capital Expansion

Cash

Cash Flow Ratio Analysis

Flow Problem

Excessive Inventory Cash Requirement for Capital Expansion Heavy Drawing by Owner
ROE Analysis Balance Sheet(CS)

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

Asset Management

Poor product quality Low quality sales staff using high pressure sales tactics Poor public relations Slow service Poor inventory control system A/R turnover in days is lower Payables are being stretched to save cash Fixed assets turnover is down due to the rapid expansion
ROE Analysis Balance Sheet(CS)

Cash Flow Ratio Analysis

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

Long Term Debt Paying Ability

Debt

ratio is excessive Times interest earned is 1.0 and is well below the loan requirement of 5.0 interest rising due to excessive borrowing and earning before EBIT is falling Cost of borrowing is rising possibly due to risk resulting from excessive borrowing

Cash Flow Ratio Analysis

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

ROE Analysis Balance Sheet(CS)

Profitability
Gross

profit margins are falling Operating profit margins are falling despite lower wages and benefits ROA is down due to both lower net income and assets turnover By 2003, the ROE is below the ROA-it doesn't pay to borrow

Cash Flow Ratio Analysis

Income Statement (Abs)

Income States' (TPA)

Income State (CS)

Balance Sheet(Abs)

Balance Sheet(TPA)

ROE Analysis Balance Sheet(CS)

Recommendation

Attempt to sell the business as going concern will take numbers of years ,but will generate the best price possible for Wallace family. Being able to leave an adequate inheritance for her son to support his lifestyle may be an important consideration at this time With no one in the family able or willing to continue to operate HPT , Jane Wallace must face the reality that the business cannot stay in the family-entrusting it to son she knew was unsuitable has already cost her dearly Jane should encourage to remain in charge but if her health permits Immediate actions Reduce inventories to reasonable level to generate needed cash return stock if possible and attempt to buy stock on a more just in time basis Discontinue all but essential capital expenditure Consider closing marginal outlets that are not generating positive cash flow Discontinue all dividends and possibly sell William Wallace home and car to generate needed equity for the business

Actions to address operational concerns

Try to reduce the duration of job to 20minutes Attract higher quality mechanics by providing a competitive salary and benefits package and adopt a customer is always right "policy to minimize public relations problem resulting from poor workmanship Go back to higher quality tires with a longer tread life better record More qualified staff should be hired at a competitive pay level Once operational problems are addressed, a media campaign and promotional program should be planned to help win back disgruntled customers

Ratio Analysis
Current Ratio Cash Ratio Inventory Turn Over In Days Account Receivable Turnover In Days Accounts Payable Turnover In Days Cash Conversion Cycle Fixed Assets Turnover Total Assets Turnover Debt Ratio Times Interest Earned Effective Interest Rate Gross Profit Margin Operating Profit Margin Net Profit Margin Return On Assets Return On Equity Coverage Actual Line Of Credit

2001
1.88 0.38 81 10.14 14.87 76.38 2.56 1.72 35.00% 8.87 40% 11.09% 5.90% 15.65% 292,500 267,435

2002
1.36 0.16 78 9.70 17.79 69.86 1.93 1.46 60.53% 3.06 39% 8.83% 3.56% 13.19% 391,000 353,000

2003
0.93 0.04 97 13.34 40.56 69.44 1.34 1.07 75.25% 1.08 39% 5.53% 0.25% 1.09% 572,500 570,638

Industry Average
1.9 0.51 60 30 15 3.19 2 30.00% 14.63 6.50% 42% 12% 6.71% 13.42% 19.17%

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Income statement: Absolute

Sales
Cost Of Goods Sold Gross Profit Depreciation Other Operating Expenses Earning Before Interest And Taxes Interest Earning Before Taxes

Income Statement For Year

Year Ending Dec 31st 2001 2002 2003

4,050,000
2,430,000 1,620,000 158,500 1,012,500 449,000 50,645 398,355

5,550,000
3,385,500 2,164,500 287,200 1,387,500 489,800 160,125 329,675

6,500,001
3,965,000 2,535,001 485,600 1,690,000 359,401 331,956 27,445

Income Taxes
Net Income

159,342
239,013

131,870
197,805

10,978
16,467

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Income Statement: Trend Percentage Analysis

Sales
Cost Of Goods Sold Gross Profit Depreciation Other Operating Expenses Earning Before Interest And Taxes

Income Statement For Year HORIZONTAL ANALYSIS 2001 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 2002 137.04% 139.32% 133.61% 181.20% 137.04% 109.09% 2003 160.49% 163.17% 156.48% 306.37% 166.91% 80.04%

Interest
Earning Before Taxes

100.00%
100.00%

316.17%
82.76%

655.46%
6.89%

Income Taxes Net Income

100.00% 100.00%

82.76% 82.76%

6.89% 6.89%

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Income Statement: Common Size

Sales
Cost Of Goods Sold Gross Profit Depreciation Other Operating Expenses Earning Before Interest And Taxes Interest Earning Before Taxes

Income Statement For Year

VERTICAL ANALYSIS 2001 100.00% 60.00% 40.00% 3.91% 25.00% 11.09% 1.25% 9.84% 2002 100.00% 61.00% 39.00% 5.17% 25.00% 8.83% 2.89% 5.94% 2003 100.00% 61.00% 39.00% 7.47% 26.00% 5.53% 5.11% 0.42%

Income Taxes
Net Income

3.93%
5.90%

2.38%
3.56%

0.17%
0.25%

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Balance Sheet: Absolute

Cash
Account Receivable Inventories Prepaid Expenses Total Current Assets Net Property Plants And Equipment Total Assets Accounts Payable Line Of Credit Current Portion Of Long Term Debt Total Current Liabilities Long Term Debt Equity Total Liabilities And Equity

Balance Sheet For The Year Year Ending Dec 31st 2001 2002 2003

155,000
45,000 540,000 25,000 765,000 1,585,000 2,350,000 99,000 267,434 41,461 407,895 414,605 1,527,500 2,350,000

110,000
59,000 723,000 36,000 928,000 2,872,000 3,800,000 165,000 353,000 162,000 680,000 1,620,000 1,500,000 3,800,000

57,000
95,000 1,050,000 42,000 1,244,000 4,856,000 6,100,000 440,556 570,638 325,346 1,336,540 3,253,460 1,510,000 6,100,000

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Balance Sheet: Trend Percentage Analysis

Cash
Account Receivable Inventories Prepaid Expenses Total Current Assets Net Property Plants And Equipments Total Assets Accounts Payable Line Of Credit Current Portion Of Long Term Debt Total Current Liabilities Long Term Debt Equity Total Liabilities And Equity

Balance Sheet For The Year HORIZONTAL ANALYSIS 2001 2002 2003

100.00%
100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

70.97%
131.11% 133.89% 144.00% 121.31% 181.20% 161.70% 166.67% 132.00% 390.73% 166.71% 390.73% 98.20% 161.70%

36.77%
211.11% 194.44% 168.00% 162.61% 306.37% 259.57% 445.01% 213.38% 784.70% 327.67% 784.71% 98.85% 259.57%

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Balance Sheet: Common Size

Cash
Account Receivable Inventories Prepaid Expenses Total Current Assets Net Property Plants And Equipments Total Assets Accounts Payable Line Of Credit Current Portion Of Long Term Debt Total Current Liabilities Long Term Debt Equity Total Liabilities And Equity

Balance Sheet For The Year VERTICAL ANALYSIS 2001 2002 2003

6.60%
1.91% 22.98% 1.06% 32.55% 67.45% 100.00% 4.21% 11.38% 1.76% 17.36% 17.64% 65.00% 100.00%

2.89%
1.55% 19.03% 0.95% 24.42% 75.58% 100.00% 4.34% 9.29% 4.26% 17.89% 42.63% 39.47% 100.00%

0.93%
1.56% 17.21% 0.69% 20.39% 79.61% 100.00% 7.22% 9.35% 5.33% 21.91% 53.34% 24.75% 100.00%

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Cash Flow Statements

2002 Operation Net Income Depreciation Change In Accounts Receivable Change In Inventories Change In Prepaid Change In Accounts Payable Total Investment Change In Propert,Plant, Equipment Financing Line Of Credit 197,805 287,200 (14,000) (183,000) (11,000) 66,000 343,005 (1,574,200) 85,566 1,325,935 Dividends Total Change In Cash Beginning Cash (225,305) 1,186,195 (45,000) 155,000 16,467 485,600 (36,000) (327,000) 6,000 275,556 408,623 (2,469,600) 217,638 1,796,806 (6,467) 2,007,977 (53,000) 110,000 2003

Ending Cash

110,000

57,000

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ANALYSIS of ROE_ 5-Way 2001 2002 2003

EBIT/SALES
EBT/EBIT NI/EBT TURNOVER DEBTRATIO

11.09%
88.72% 60.00% 1.72 35.00%

8.83% 5.53%
67.31% 7.64% 60.00% 60.00% 1.46 1.07

60.53% 75.25%

RETURN ON EQUITY

15.65%

13.19% 1.09%

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