Business Process Management Graduate Certificate FINA55142 Applied Financial Analysis Scenario Analysis (in-Class Report) High Performance

Tire Business Issue Report

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Prepared By: Gurpreet Anand! Submitted To: Francis Fasanu! Submission Date: 6'th October 2013!

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Business Process Management Graduate Certificate FINA55142 Applied Financial Analysis Scenario Analysis (in-Class Report) High Performance Tire Business Issue Report

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Introduction! High Performance Tires Ltd (HPT hereupon) has been in the business of selling high quality tires for over 5 decades. Founded by Harry and Edna Wallace in 1952, HPT was later helmed by their daughter, Jane Wallace, who went on to spearhead the company till 2001. Thereafter, she passed complete responsibility of running the company to her successor and son, William Wallace. A MBA graduate who specialized in marketing and finance, William took the reigns of the company and immediately put in place, an aggressive expansion plan that aimed to increase the outlet count and diversify product portfolio. Until recently, Jane Wallace took back control of the company citing her comeback due to slumping profits and dismal performance of the tire retailer in recent years. In subsequent text, we will look at key financial ratios such as profitability, liquidity, asset management and other ratios of the ailing company, provide assessments of current state of affairs, and propose improvements, wherever necessary. The purpose of this report is to analyze, investigate and provide recommendations to assist Jane Wallace in making informed decision about the future of the company. ! ! Profitability! Profitability ratios are good precedents of assessing the overall profitability of a firm. The gross profit margin, one of such metrics, is used to measure how much revenue is left over

Gross Prot Margin (HPT Ltd) Gross Prot Margin (Industry-Wide)

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Business Process Management Graduate Certificate FINA55142 Applied Financial Analysis Scenario Analysis (in-Class Report) High Performance Tire Business Issue Report

after accounting for the total cost of goods sold. In the case HPT Ltd, the firm had a gross profit margin ratio of 40% in 2001 when William Wallace took control of the company. In following years, the margin dropped by 1 point to 39% in both 2002 and 2003. Although, the margin during Mr. Wallace's reign doesn't fair badly when compared to the industry standard of 42%, the declining trend could spell dire problems for the company's future. The cost-cutting measures that Mr Wallace had adopted weren't enough to offset the increased expenditures in expanding facilitates to incorporate new product offerings like fluid changes and other vehicular maintenances. !

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Liquidity! Liquidity metrics are more often concerned with a firm's ability to pay off it's short term obligations. One of more popular ratios is the current ratio which compares the current assets with current liabilities to derive a figure that varies from industry to industry. In the case of HPT Ltd, the industry standard has been set at 1.90, and at the end of first year of Mr Wallace's term, the company was tracking a favorable current ratio of 1.88. However, in the subsequent years, the situation started to look bleak. In the year 2002, HPT Ltd had a current ratio of 1.36, a 27% decline over the preceding year. Similarly, the current ratio dropped to 0.93 in 2003, a staggering 68% decline over the previous year. At this rate, the company's prospects of meeting its payment obligations to creditors will be severely dented, rendering it as an unreliable company to both lenders and investors alike. !

Current ratio

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Asset Management!
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Business Process Management Graduate Certificate FINA55142 Applied Financial Analysis Scenario Analysis (in-Class Report) High Performance Tire Business Issue Report

Asset management ratios are particularly important in evaluating a company's ability to leverage its assets in order to generate sales. Inventory Turnover ratio in days is a very important metric in Supply Chain Management, often used to measure the number of days it takes a business to cycle through its inventory. A higher turnover ratio is generally indicative of good performance as the company is able to sell off it's inventory more quickly. Taking a glance at the inventory position of HPT Ltd when Mr. Wallace took office, it becomes immediately evident that the tire retailer was sitting on inventory longer, as it took the company around 81 days to sell off its inventory in 2001. Fast forward to 2003, it seems that HPT's inventory situation had only worsened. It took the company around 97 days to convert it's inventory into sales in 2003. In contrast, the industry did much better by selling off their collective inventories in just 60 days. Not only was HPT holding on to it's inventory longer, the company also had significant money tied in it. Furthermore, the company had to deal with higher carrying and storage costs, and the obsolesce costs that come along with such a practice, putting immense strain on its operating cash.!

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Long Term Debt!
Investors and lenders, who have vested interest in a company, are likely going to be interested in it's financial leverage. One way of measuring a company's debt situation is by utilizing the debt ratio. This ratio tracks the relationship between the total debt and total assets of a company. Basically, a higher percentage of debt ratio indicates that the company finances more of it's assets by provisioning debt. In HPT's case, the company had a higher than industry average debt ratio of 35%. In 2003, the number shot up to alarmingly high figure of 75%, meaning that only a quarter of the portion of HPT's assets are being financed by sources other than debt. This puts the tire retailer in enormous risk of experiencing disruptions in operations, and likely become a target of scrutiny by banks upon which it increasingly relies on.

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Business Process Management Graduate Certificate FINA55142 Applied Financial Analysis Scenario Analysis (in-Class Report) High Performance Tire Business Issue Report

Conclusion & recommendation!

High Performance Tire Ltd has some glaring problems, many of which are attributed to poor management of costs, inventory and overall liabilities. Mr. Wallace's expansion plan, an ambitious undertaking, would have faired much better if certain steps had been taken. ! First, instead of injecting a lot of cash into expanding new facilities, William could have chosen to franchise portions of the business to service garages. This way, not only could the company circumvent some of the expenditures associated with such a plan, it could also benefit from working with franchisees who had fostered strong ties in smaller communities. Additionally, having a larger cash pile would have helped the company to improve it's debt ratio, a strong indicator of financial health.! Secondly, the high inventory turnover in days could have been shrunk had the company chosen to adopt principle of Just In Time (JIT). By following a multi-vendor sourcing approach, HPT could hold just enough inventory to satisfy consumer and free up a lot of its cash that went into stocking up.! Lastly, HPT would need to put significant focus on improving its current ratio as it has a $600,000 line-of-credit from TD which is crucial at a time when the company is in duress. To begin with, HPT can improve its collection practices, thereby increasing both its cash and current ratio. Similarly, it can negotiate better payments terms with vendors to hold on to cash longer. Finally, decreasing current liabilities by utilizing long-term debt, could help positively impact the current ratio.!

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