Finance report

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Humber College *

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Apr 3, 2024

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Executive Summary According to the lawsuit, High-Performance Tyre failed. The company was performing well until 2001, when Jane Wallace gave her son William Wallace control of the company. The company's demise was caused by his goal to take it nationwide and extend its operations. As an MBA who completed a project at his college on modernising businesses, he used the same principles to this business. He didn't believe that his concepts could cause a company to fail. According to our advice, Jane need to have monitored his son's actions and advised them.

Introduction: In 1952, Harry and Edna Wallace launched Hire Tyre Performance Limited (HPT). When their parents perished in an accident in 2001, their daughter Jane Wallace took over as CEO of the business. By supplying high-quality tyres, the company lasted almost 50 years in business. To maintain family continuity, Jane passed the company to her recently graduated MBA son William Wallace. He was an expert in both marketing and finance. Willian had a plan to grow the business as soon as he obtained the rights. By increasing the number of outlets and diversifying the product line, he began the company's expansion. Due to numerous complaints about the business, a decline in goodwill, and other factors, Jane Wallace had to assume control of the organisation. Qualitative & Quantitative analysis 1. Profitability  GROSS PROFIT MARGIN Compared to the industry average of 42%, HPT's gross profit margin in 2001 was 40%, fell to 39% in 2002, and stayed at 39% in 2003. The good news about this ratio is that despite HPT accumulating a lot of debt and costs, it hasn't had a significant influence on their gross profit margin. This ratio is also far lower than the industry average.  OPERATING PROFIT MARGIN The industry average is 12%, however HPT had 11.09% in 2001, 8.83% in 2002, and 5.53% in 2003. This demonstrates that while HPT may have a respectable gross profit margin, the company's operational expenditure is extremely high, reducing the profit margin and placing the business in a precarious financial position.  NET PROFIT MARGIN In contrast to the industry average net profit margin of 6.71%, HPT had a net profit margin of 5.90% in 2001, 3.56% in 2002, and 0.25% in 2003. While the company's sales have been rising, expenditure has been eating away at the net profit the business has been able to make. The business should concentrate on cutting operational costs. 2. Liquidity

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 CURRENT RATIO The current ratio for the sector is 1.90 on average. The present ratio has been declining since 2001, as can be seen. It was below the industry average in 2001, but as time went on, it became clear that things had become worse. The current ratio is being negatively impacted by the rise in liabilities assumed for growth, which might jeopardize High Performance tire in difficult economic times.  CASH RATIO We may determine the company's cash and marketable security position in relation to its current obligations using the cash ratio. The trend for high performance tires is not good, and their cash levels have been steadily declining. The industry standard is 0.51; thus, every other rival has cash equivalent to 50% of their current obligations. There is no change in this percentage, which is quite bad. The main goals for high performance tires should be to build up their cash reserves and reduce their current obligations. To make the firm more financially sound, they should temporarily suspend expansion and cut back on excessive expenses.

Horizontal Analysis of Income Statement Income Statement Particulars 2003 2002 2001 2003 2002 Amount (Increase/De crease) Percen tage Amount (Increase/De crease) Percen tage Sales $ 6,500,000 $ 5,550,000 $ 4,050,000 $ 950,000 17.12 $ 1,500,000 37.04 Cost of Goods Sold $ 3,965,000 $ 3,385,500 $ 2,430,000 $ 579,500 17.12 $ 955,500 39.32 Gross Profit $ 2,535,000 $ 2,164,500 $ 1,620,000 $ 370,500 17.12 $ 544,500 33.61 Depreciation $ 485,600 $ 287,200 $ 158,500 $ 198,400 69.08 $ 128,700 81.20 Other Operating Expenses $ 1,690,000 $ 1,387,500 $ 1,012,500 $ 302,500 21.80 $ 375,000 37.04 Earnings Before Interest and Taxes $ 359,400 $ 489,800 $ 449,000 $ (130,400) -26.62 $ 40,800 9.09 Interest $ 331,956 $ 160,125 $ 50,645 $ 171,831 107.31 $ 109,480 216.17 Earnings Before Taxes $ 27,444 $ 329,675 $ 398,355 $ (302,231) -91.68 $ (68,680) -17.24 Income Taxes $ 10,978 $ 131,870 $ 159,342 $ (120,892) -91.68 $ (27,472) -17.24 Net Income $ 16,467 $ 197,805 $ 239,013 $ (181,338) -91.68 $ (41,208) -17.24 Sales: Over the past three years, sales have steadily climbed, with 2001–2002 seeing the biggest jump. Cost of Goods Sold: Year-over-year increases in the cost of goods sold have an effect on gross profit margins. Sales - Sales rose, but gross profit grew more slowly because the cost of products sold went up. Depreciation: Depreciation costs increased significantly, especially between 2001 and 2002. Other Operating Expenses: Other operating expenses rose annually, reducing overall profits.

Earnings Before Interest and Taxes (EBIT): In 2003, EBIT fell as a result of escalating interest costs, which hurt profitability. Interest: Earnings before taxes were impacted by a significant increase in interest expenses. Net Income : Due to less revenue before taxes and greater interest and tax charges, net income has continually declined. In conclusion, the business struggled to control costs, particularly the rising cost of goods sold and interest costs, which over time resulted in declining profitability. To address the fundamental reasons and devise solutions to reduce these issues, more investigation would be required. Horizontal Analysis for Balance sheet Balance Sheet Particulars 2003 2002 2001 2003 2002 Amount (Increase/dec rease) percent age Amount (Increase/Dec rease) Percent age Cash $ 57,000 $ 110,000 $ 155,000 $ (53,000) -48.18 $ (45,000) -29.03 Accounts Receivable $ 95,000 $ 59,000 $ 45,000 $ 36,000 61.02 $ 14,000 31.11 Inventories $ 1,050,0 00 $ 723,000 $ 540,000 $ 327,000 45.23 $ 183,000 33.89 Prepaid Expenses $ 42,000 $ 36,000 $ 25,000 $ 6,000 16.67 $ 11,000 44.00 Total Current Assets $ 1,244,0 00 $ 928,000 $ 765,000 $ 316,000 34.05 $ 163,000 21.31 Property, Plant and Equipment $ 7,288,8 00 $ 4,819,2 00 $ 3,245,0 00 $ 2,469,600 51.25 $ 1,574,200 48.51 Less: Accumulative Depreciation $ 2,432,8 00 $ 1,947,2 00 $ 1,660,0 00 $ 485,600 24.94 $ 287,200 17.30 Net Property, Plant and Equipment $ 4,856,0 00 $ 2,872,0 00 $ 1,585,0 00 $ 1,984,000 69.08 $ 1,287,000 81.20 Total Assets $ 6,100,0 $ 3,800,0 $ 2,350,0 $ 2,300,000 60.53 $ 1,450,000 61.70

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00 00 00 Accounts Payable $ 440,556 $ 165,000 $ 99,000 $ 275,556 167.00 $ 66,000 66.67 Line of Credit $ 570,638 $ 353,000 $ 267,435 $ 217,638 61.65 $ 85,565 31.99 Current Portion of Long-term Debt $ 325,346 $ 162,000 $ 41,461 $ 163,346 100.83 $ 120,539 290.73 Total Current Liabilities $ 1,336,5 40 $ 680,000 $ 407,895 $ 656,540 96.55 $ 272,105 66.71 Long-term Debt $ 3,253,4 60 $ 1,620,0 00 $ 414,605 $ 1,633,460 100.83 $ 1,205,395 290.73 Equity $ 1,510,0 00 $ 1,500,0 00 $ 1,527,5 00 $ 10,000 0.67 $ (27,500) -1.80 Total Liabilities and Equity $ 6,100,0 00 $ 3,800,0 00 $ 2,350,0 00 $ 2,300,000 60.53 $ 1,450,000 61.70  Over time, the company's assets, notably its property, plant, and equipment, have increased, signaling prospective growth or investment.  Both accounts receivable and inventory have significantly increased, which can be a sign of increasing production or sales activity.  The company's financial burden and capacity to meet its debt commitments may come under scrutiny due to the increase in liabilities, particularly long-term debt, and accounts payable.  The dependence on the line of credit and rising long-term debt point to a requirement for outside funding.  The minor drop in equity could be brought about by a number of things, such as net income, dividend payments, or adjustments to reserves. Vertical Analysis of Income Statement

For Year Ending December 31 2003 2002 2001 2003 2002 2001 Sales 6,500,000 $ 5,550,000 $ 4,050,000 $ 100 100 100 Cost of Goods Sold 3,965,000 $ 3,385,500 $ 2,430,000 $ 61.00 61.00 60.00 Gross Profit 2,535,000 $ 2,164,500 $ 1,620,000 $ 39.00 39.00 40.00 Depreciation 485,600 $ 287,200 $ 158,500 $ 7.47 5.17 3.91 Other Operating Expenses 1,690,000 $ 1,387,500 $ 1,012,500 $ 26.00 25.00 25.00 Earnings Before Interest and Taxes 359,400 $ 489,800 $ 449,000 $ 5.53 8.83 11.09 Interest 331,956 $ 160,125 $ 50,645 $ 5.11 2.89 1.25 Earnings Before Taxes 27,444 $ 329,675 $ 398,355 $ 0.42 5.94 9.84 Income Taxes 10,978 $ 131,870 $ 159,342 $ 0.17 2.38 3.93 Net Income 16,467 $ 197,805 $ 239,013 $ 0.25 3.56 5.90 Income Statement Common-size percentage A few interesting trends are revealed by the common-size percentage analysis of the revenue statements for 2003, 2002, and 2001. Over the course of the three years, sales grew steadily, with an astounding 37% jump in 2002 compared to 2001. However, as a percentage of sales, the cost of goods sold remained comparatively consistent, demonstrating careful cost control. Despite the rise in sales, gross profit margins held stable at roughly 39%. From 2001 to 2002, depreciation costs increased significantly, indicating capital asset investments. Earnings before interest and taxes (EBIT), which reached 5.53% in 2003, significantly dropped during the three years. This decline could be attributable to rising interest costs, which decreased profitability by increasing from 1.25% in 2001 to 5.11% in 2003. Despite the drop in EBIT, the business was able to keep income tax costs under control, resulting in relatively consistent net income as a percentage of sales. The report emphasizes how crucial it is to keep an eye on spending and interest rates to preserve a healthy bottom line. Vertical Analysis of Balance Sheet

2003 2002 2001 2003 2002 2001 Assests Cash 57,000 $ 110,000 $ 155,000 $ 0.93 2.89 6.60 Accounts Receivable 95,000 $ 59,000 $ 45,000 $ 1.56 1.55 1.91 Inventories 1,050,000 $ 723,000 $ 540,000 $ 17.21 19.03 22.98 Prepaid Expenses 42,000 $ 36,000 $ 25,000 $ 0.69 0.95 1.06 Total Current Assets 1,244,000 $ 928,000 $ 765,000 $ 20.39 24.42 32.55 Property, Plant and Equipment 7,288,800 $ 4,819,200 $ 3,245,000 $ 119.49 126.82 138.09 Less: Accumulative Depreciation 2,432,800 $ 1,947,200 $ 1,660,000 $ 39.88 51.24 70.64 Net Property, Plant and Equipment 4,856,000 $ 2,872,000 $ 1,585,000 $ 79.61 75.58 67.45 Total Assets 6,100,000 $ 3,800,000 $ 2,350,000 $ 100 100 100 Liabilities and shareholders equity Accounts Payable 440,556 $ 165,000 $ 99,000 $ 7.22 4.34211 4.21 Line of Credit 570,638 $ 353,000 $ 267,435 $ 9.35 9.28947 11.38 Current Portion of Long-term Debt 325,346 $ 162,000 $ 41,461 $ 5.33 4.26316 1.76 Total Current Liabilities 1,336,540 $ 680,000 $ 407,895 $ 21.91 17.8947 17.36 Long-term Debt 3,253,460 $ 1,620,000 $ 414,605 $ 53.34 42.6316 17.64 Equity 1,510,000 $ 1,500,000 $ 1,527,500 $ 24.75 39.4737 65.00 Total Liabilities and Equity 6,100,000 $ 3,800,000 $ 2,350,000 $ 100 100 100 Balance Sheet Common-size percentage  A number of important patterns are revealed by the balance sheet's common-size percentage analysis for 2003, 2002, and 2001. As a percentage of total assets, cash decreased, possibly signaling problems with cash management.  The small increase in accounts receivable as a percentage of assets suggests that credit practices have changed.  The proportional rise in inventory levels could be a symptom of difficulties with inventory management.  Prepaid costs remained largely constant. Increasing investments in tangible assets are shown by the percentage increase in property, plant, and equipment.  Accounts payable and credit increased in relation to total liabilities and equity on the liability side, indicating a greater reliance on external funding.  A rise in the ratio of current debt to long-term debt may be a sign of increased short-term debt commitments and debt dependency. The equity ratio dropped, reflecting changes in the capital structure.

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3. Asset Management  INVENTORY TURNOVER IN DAYS The industry standard is 60 days. Again, the data for High Performance tires are low, which implies that while their rivals sell out of their stock in 60 days. In 2003, High Performance Tire's inventory renewal process took 96 days. The business ought to have been concentrating on how to increase inventory turnover, but no evidence of progress has been seen. Although it drops to 77.95 days in 2002, it again increased to 96.66 days in 2003.  FIXED ASSETS TURNOVER RATIO How much a corporation makes from its long-term assets is shown by its fixed asset turnover ratio. Since the industry average is 3.19, a corporation makes $3.19 for every dollar invested in long-term assets. Just $0.79 in 2003 and $0.85 in 2002 were made by high performance tires.  TOTAL ASSETS TURNOVER RATIO The ratio of total assets to sales compares sales to the company's assets. It has been 2% on average for the sector. In 2001, the HPT ratio was 1.72; in 2002, it was 1.46; and in 2003, it was 1.07. This demonstrates that their resources are not being used effectively, and there is much space for development.  RETURN ON ASSETS The industry average for this ratio was 13.42%, but the HPT ratio has not been encouraging and has been steadily dropping since 2001, when it was 10.17%, almost at the industry average in 2002, and in 2003, when it was only 0.27%. This ratio effectively tells the corporation what returns it may generate on its total assets because of the investor's loss of faith in the business. This ratio is crucial since it informs investors about the efficiency of the company's resources. 4.Long Term Debt  ACCOUNTS PAYABLE TURNOVER RATIO This ratio reveals how quickly a business pays off its debtors. High performance tires have been steadily deteriorating since 2001. In that year, it took them 14 days to pay off their debts. In the following two years, it took them 17.78 days and 40.55 days, respectively, to do so. This demonstrates that the business is losing trust in the sector, given the industry standard is 15 days.  DEBT RATIO This ratio illustrates a company's debt load relative to total assets. 30% has been the standard for the sector. In 2001, there were 35% of high-performance tires. This number rose to 61% in 2002 and then sharply to 75% in 2003.  TIMES INTEREST EARNED.

The firm essentially generated 14.63 times more interest to pay its interest than the industry average, which was 14.63 times. In 2001, high performance tires were used 8.87 times, 3.06 times in 2002, and 1.08 times in 2003. The business has been steadily losing ground financially.  RETURN ON EQUITY Compared to the industry average of 19.17%, HPT had a return on equity of 1.09% in 2003, down from 13.19% in 2002 and 15.65% in 2001. In essence, this ratio represents the expected return on common stock for shareholders. This is not a good statistic for HPT since it might cause problems if the firm wants to borrow additional money in the form of stock because of these poor performance metrics. They would also be losing their trust with their shareholders as a result. RATIOS INDUSTRY AVERAGE 2001 2002 2003 Current Ratio 1.9 1.88 1.36 0.93 Cash Ratio 0.51 0.38 0.16 0.04 Inventory Turnover in Days 60 days 81.11 77.95 96.66 Accounts Payable Turnover in Days 15 days 14 17.78 40.55 Fixed Assets Turnover 3.19 N/A 0.85 0.79 Total Assets Turnover 2 1.72 1.46 1.07 Debt Ratio 30% 35% 61% 75% Times Interest Earned 14.63 8.87 3.06 1.08 Gross profit Margin 42.00% 40% 39% 39% Operating Profit Margin 12.00% 11.09% 8.83% 5.53% Net Profit Margin 6.71% 5.90% 3.56% 0.25% Return on Assets 13.42% 10.17% 5.21% 0.27% Return on Equity 19.17% 15.65% 13.19% 1.09% Recommendation Jane Wallace is in a pickle because she wants the business to be handled by her family, but William's strategy has put the business in a difficult predicament. She has thus employed Jenny Chen. If she genuinely wants the business to be run by her family, she can advise William on his goals, where he is making mistakes, and what he could do to

make the business lucrative. consumers' dissatisfaction and many legal proceedings have been the main causes of businesses' demise; thus, Jane should always maintain customer feedback forms available so she may determine what steps the business needs take to win over consumers' trust. Given her reputation in the market, Jane should engage with the bank and offer them the assurance that they may expect repayment of the debt or a restructuring of the loan schedule. One of the factors that contributed to the failure was a cost-cutting approach implemented by William, which should be stopped so that personnel with strong credentials may be paid more. Conclusion As a conclusion, I'd like to say that this case study has shown us how making the incorrect choice may lead to a business' demise. In this study, we have seen that all of the financials and ratios were indicating where the firm was in trouble. Jane should follow the advice given since she has business sense and can lead and make the firm profitable by devoting time to William's concept and venture.

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Appendices Formulas FINANCIAL RATIOS LIQUIDITY CURRENTRA TIO CURRENT ASSETS CURRENT LIABILITIES QUICK R ATIO CURRENT ASSETS - INVENTORIE S - PREPAID EXPENSES CURRENT LIABILITIES CASH RATIO  CASH  MARKETABLE SECURITIES CURRENT LIABILITIES NWC CURRENT ASSETS - CURRENT LIABILITIES NWCTO TOTAL ASSETS NWC TOTAL ASSETS

Exhibit (continued) ASSET MANAGEMENT A/ RTURNOVER NET CREDIT SALES AVERAGE ACCOUNTS RECEIVABLE A/R TURNOVER IN DAYS  365 A/R TURNOVER INVENTORYTURNO VER COST OF GOODS SOLD AVERAGE INVENTORIES INVENTORYTURNOVER IN DAYS 36 5 INVENTORY TURNOVER OPERATING CYCLE  INVENTORY TURNOVER IN DAYS A/R TURNOVER IN DAYS A/ PTURNOVE R COST OF GOODS SOLD AVERAGE ACCOUNTS PAYABLE 36 5 A/PTURNOVER IN DAYS A/P TURNOVER CASH CONVERSION CYCLE  INVENTORY TURNOVER IN DAYS - A/P

TURNOVER IN DAYS  A/R TURNOVER IN DAYS NWCTURNO VER NET SALES AVERAGE NET WORKING CAPITAL NET SALES FIXEDASSETS TURNOVER AVERAGE CAPITAL ASSETS TOTA L ASSET S TURNOVER  NET SALES AVERAGE TOTAL ASSETS

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Exhibit (continued) LONG-TERM DEBT PAYING ABILITY Leverage Ratios DEBTRAT IO TOTAL LIABILITIES TOTAL ASSETS LT LIABILITIES LT DEBT TO TOTAL CAPITALIZA TION  LT LIABILITIES  EQUITY DEBT/EQUITY RATIO TOTAL LIABILITI ES TOTAL EQUITY Coverage Ratios TIMESINTEREST EARNED EBIT INTEREST EXPENSE CASH FLOW COVERAGE  EBIT  LEASE EXPENSE  DEPRECIATI ON LEASE EXPENSE  INTEREST EXPENSE  PREFERRED DIVIDENDS / (1  t) PRINCIPAL PAYMENTS / (1  t) EFFECTIVE INTEREST RATE  INTEREST EXPENSE TOTAL INTEREST  BEARING DEBT

Exhibit (continued) PROFITABILITY In Relation to Sales GROS S PROFI T MARGI N  GROSS NE T PROFI T SALES OPERATIN G PROFI T MARGI N  OPERATINGINCOME NET PROFIT MARGI N  NET NE T NET SALES INCO ME SALES In Relation to Investment OPERATING INCOME RETURN ON INVESTMENT  NET INCOME  I (1 - t) RETURN ON ASSETS  AVERAGE TOTAL ASSETS EBI T AVERAGE TOTAL ASSETS RETURNON EQUITY NET INCOME AVERAGE TOTAL EQUITY

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