High Perf Hbs Av 2012 Fra

7/31/2019 High Perf Hbs Av 2012 Fra

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HIGHPERFORMANCETIRESDr Ashish Varma

Ph.D, FICWA, PGDMAssistant ProfIMT Gzb2012


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The Beginning A Retail Tire Chain

Formed by HARRY & EDNA

WALLACE.

1952


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Family OwnedBusinessPassed the business to theirDaughter JANE WALLACE.

Late1960s

Efficient Management& Interpersonal Skills

Lead the firm togrowth & stability


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Family Business (II)& The DownturnAt Age of 64, Passed on thebusiness to her Son WILLAM

WILLACE.By 2004 HTP was havingdifficulties

2001


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William WallaceMBA with doubleconcentration in Marketing &

FinanceCarefree & Privileged lifeImpatientDisorganized & Poor Planner


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Williams Tenure Failed Expansion Plan

Loosing Experienced Staff Low Quality Raw Materials

Faulty Accounting System

Skip Details


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Williams Tenure(Failed Expansion Plan)

Action

Put a major ExpansionPlanExpand the number ofretail outlet in smallercommunityDiversify the products &Service

Automotive Maintenance

Fluid Change ServiceTune UpsAlignmentBatteryBrakes

Effect

Increased CustomerDissatisfactionLong Waiting Periods for fluidchangePrior Appointment Required

Reputation of Unskilledmechanics.

Number of Damage cases

Forced by court to pay theclaims.

PR takes a beatingCouldnt compete withlocal service station insmaller community

Back


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Williams Tenure(Loosing Experienced Staff)

Action

Cut down the Wages &Benefits to increaseprofitability.

Commission to sales staffas per sales volume

Effect

Experienced & loyalprofessional left.Replaced by inexperienced& young staff

New staff have poorcustomer service skills

Commission lead tohighly aggressivepractice that alienatedcustomers

Back


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Williams Tenure(Low Quality Raw Materials)

Actions

Started Buying NO NAMEtiers from overseassuppliers to increaseprofit.

Initially Generated HighProfit

Effect

Quality ConcernsShorter Thread Life

Blowouts

Sales margin Falls

Back


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Williams Tenure(Faulty Accounting System)

Actions

A accounting system waspurchased in 2002 toautomate generalaccounting

Choose a low costvendor

Effect

Poor S/W installation &training.Clerical Staff Struggled.

Worsen due to highemployee turnover.

Lot of overtime to cleardata backlog.

Customers & supplierswere alienated overdelays & errors

Back


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Jane WallaceSteps INSuspended all dividendspayment.

Early2003

Hired JENNY CHEN,(CA, CFA, CMC)From accounting firm ofDexter, Mathew & Jones


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Jenny Chens

Challenge Prepare a operation review.

Analyze why things

deteriorated so much. How to improve operations.

Recommend Futuremanagement


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Financial Situation $600,000 Line of Credit 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

Separate term loans & mortgages to finance itscapital purchase

Retail Sales by cash & Credit card. Slowdown in local Economy Forest Fire in 2003 summer Collapse of Canadian Beef Industry

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)

IncomeStatement (Abs)

RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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Case Analysis & FindingsLiquidity

Asset ManagementLong Term Debt Paying Ability

Profitability

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)


RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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LiquidityCurrent Ratio is below the Loan

Requirement

Excessive Inventory Stretching of payables

Cash Requirement for Capital Expansion

Cash Flow Problem

Excessive Inventory Cash Requirement for Capital Expansion

Heavy Drawing by Owner

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)


RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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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

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)


RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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Long Term Debt PayingAbilityDebt ratio is excessive

Times interest earned is 1.0 and is wellbelow the loan requirement of 5.0 interestrising due to excessive borrowing andearning before EBIT is falling

Cost of borrowing is rising possibly due to

risk resulting from excessive borrowing

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)


RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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Profitability

Gross profit margins are falling

Operating profit margins are fallingdespite lower wages and benefits

ROA is down due to both lower netincome and assets turnover

By 2003, the ROE is below the ROA-itdoesn't pay to borrow

BalanceSheet(Abs)

BalanceSheet(TPA)

IncomeState (CS)

IncomeStates' (TPA)


RatioAnalysis

BalanceSheet(CS)

CashFlow

ROEAnalysis


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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 ableto leave an adequate inheritance for her son to support his lifestyle maybe 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 thefamily-entrusting it to son she knew was unsuitable has already cost herdearly

Jane should encourage to remain in charge but if her health permits

Immediate actions-

Reduce inventories to reasonable level to generate needed cashreturn stock if possible and attempt to buy stock on a more just intime basis

Discontinue all but essential capital expenditure

Consider closing marginal outlets that are not generating positivecash flow

Discontinue all dividends and possibly sell William Wallace home and

car to generate needed equity for the business


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Actions to address operationalconcerns

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 publicrelations 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 mediacampaign and promotional program should beplanned to help win back disgruntled customers


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Ratio Analysis2001 2002 2003 IndustryAverage

Current Ratio 1.88 1.36 0.93 1.9Cash Ratio 0.38 0.16 0.04 0.51Inventory Turn Over In Days 81 78 97 60Account Receivable Turnover In Days 10.14 9.70 13.34 30Accounts Payable Turnover In Days 14.87 17.79 40.56 15Cash Conversion Cycle 76.38 69.86 69.44Fixed Assets Turnover 2.56 1.93 1.34 3.19Total Assets Turnover 1.72 1.46 1.07 2Debt Ratio 35.00% 60.53% 75.25% 30.00%Times Interest Earned 8.87 3.06 1.08 14.63Effective Interest Rate 6.50%Gross Profit Margin 40% 39% 39% 42%Operating Profit Margin 11.09% 8.83% 5.53% 12%Net Profit Margin 5.90% 3.56% 0.25% 6.71%Return On Assets 13.42%Return On Equity 15.65% 13.19% 1.09% 19.17%Coverage 292,500 391,000 572,500Actual Line Of Credit

267,435 353,000 570,638

BACK


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Income statement:Absolute

Income Statement For YearYear Ending Dec 31st

2001 2002 2003Sales 4,050,000 5,550,000 6,500,001Cost Of Goods Sold 2,430,000 3,385,500 3,965,000Gross Profit 1,620,000 2,164,500 2,535,001

Depreciation 158,500 287,200 485,600Other Operating Expenses 1,012,500 1,387,500 1,690,000Earning Before Interest And Taxes 449,000 489,800 359,401

Interest 50,645 160,125 331,956Earning Before Taxes 398,355 329,675 27,445

Income Taxes 159,342 131,870 10,978Net Income

239,013 197,805 16,467

BACK


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Income Statement:Trend Percentage Analysis

Income Statement For YearHORIZONTAL ANALYSIS

2001 2002 2003Sales 100.00% 137.04% 160.49%Cost Of Goods Sold 100.00% 139.32% 163.17%Gross Profit 100.00% 133.61% 156.48%

Depreciation 100.00% 181.20% 306.37%Other Operating Expenses 100.00% 137.04% 166.91%Earning Before Interest And Taxes 100.00% 109.09% 80.04%

Interest 100.00% 316.17% 655.46%Earning Before Taxes 100.00% 82.76% 6.89%

Income Taxes 100.00% 82.76% 6.89%Net Income 100.00% 82.76% 6.89%

BACK


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Income Statement:Common Size

Income Statement For YearVERTICAL ANALYSIS

2001 2002 2003Sales 100.00% 100.00% 100.00%Cost Of Goods Sold 60.00% 61.00% 61.00%Gross Profit 40.00% 39.00% 39.00%

Depreciation 3.91% 5.17% 7.47%Other Operating Expenses 25.00% 25.00% 26.00%Earning Before Interest And Taxes 11.09% 8.83% 5.53%

Interest 1.25% 2.89% 5.11%Earning Before Taxes 9.84% 5.94% 0.42%

Income Taxes 3.93% 2.38% 0.17%

Net Income

5.90%

3.56%

0.25%

BACK


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Balance Sheet:Absolute

Balance Sheet For The YearYear Ending Dec 31st

2001 2002 2003Cash 155,000 110,000 57,000Account Receivable 45,000 59,000 95,000Inventories 540,000 723,000 1,050,000Prepaid Expenses 25,000 36,000 42,000

Total Current Assets 765,000 928,000 1,244,000Net Property Plants And Equipment 1,585,000 2,872,000 4,856,000

Total Assets 2,350,000 3,800,000 6,100,000

Accounts Payable 99,000 165,000 440,556Line Of Credit 267,434 353,000 570,638Current Portion Of Long Term Debt 41,461 162,000 325,346

Total Current Liabilities 407,895 680,000 1,336,540Long Term Debt 414,605 1,620,000 3,253,460Equity 1,527,500 1,500,000 1,510,000

Total Liabilities And Equity 2,350,000 3,800,000 6,100,000BACK


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Balance Sheet:Trend Percentage Analysis

Balance Sheet For The YearHORIZONTAL ANALYSIS

2001 2002 2003Cash 100.00% 70.97% 36.77%Account Receivable 100.00% 131.11% 211.11%Inventories 100.00% 133.89% 194.44%Prepaid Expenses 100.00% 144.00% 168.00%

Total Current Assets 100.00% 121.31% 162.61%Net Property Plants And Equipments 100.00% 181.20% 306.37%

Total Assets 100.00% 161.70% 259.57%

Accounts Payable 100.00% 166.67% 445.01%Line Of Credit 100.00% 132.00% 213.38%Current Portion Of Long Term Debt 100.00% 390.73% 784.70%

Total Current Liabilities 100.00% 166.71% 327.67%Long Term Debt 100.00% 390.73% 784.71%Equity 100.00% 98.20% 98.85%

Total Liabilities And Equity 100.00% 161.70% 259.57%BACK


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Balance Sheet:Common Size

Balance Sheet For The YearVERTICAL ANALYSIS

2001 2002 2003Cash 6.60% 2.89% 0.93%Account Receivable 1.91% 1.55% 1.56%Inventories 22.98% 19.03% 17.21%Prepaid Expenses 1.06% 0.95% 0.69%

Total Current Assets 32.55% 24.42% 20.39%Net Property Plants And Equipments 67.45% 75.58% 79.61%

Total Assets 100.00% 100.00% 100.00%

Accounts Payable 4.21% 4.34% 7.22%Line Of Credit 11.38% 9.29% 9.35%Current Portion Of Long Term Debt 1.76% 4.26% 5.33%

Total Current Liabilities 17.36% 17.89% 21.91%Long Term Debt 17.64% 42.63% 53.34%Equity 65.00% 39.47% 24.75%

Total Liabilities And Equity 100.00% 100.00% 100.00%BACK


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Cash Flow Statements2002 2003

OperationNet Income 197,805 16,467Depreciation 287,200 485,600Change In Accounts Receivable (14,000) (36,000)Change In Inventories (183,000) (327,000)Change In Prepaid (11,000) 6,000Change In Accounts Payable 66,000 275,556

Total 343,005 408,623Investment

Change In Propert,Plant, Equipment (1,574,200) (2,469,600)Financing

Line Of Credit 85,566 217,6381,325,935 1,796,806

Dividends (225,305) (6,467)Total 1,186,195 2,007,977Change In Cash (45,000) (53,000)Beginning Cash 155,000 110,000Ending Cash

110,000 57,000

BACK


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ANALYSIS of ROE_ 5-Way2001 2002 2003

EBIT/SALES 11.09% 8.83% 5.53%EBT/EBIT 88.72% 67.31% 7.64%NI/EBT 60.00% 60.00%60.00%TURNOVER 1.72 1.46 1.07DEBTRATIO 35.00% 60.53%75.25%RETURN ON EQUITY 15.65% 13.19% 1.09%

High Perf Hbs Av 2012 Fra

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