Goodyear Tire & Rubber Company On February 14, 2012

On February 14 2012 Goodyear Tire Rubber Company With World Headq

On February 14, 2012, Goodyear Tire & Rubber Company, with world headquarters in Akron, Ohio, reported on their 2011 4th quarter earnings. Their total revenue for the quarter that ended on December 31, 2011, was $5,683,000,000; cost of revenue was $4,815,000,000; giving a gross profit of $868,000,000. After subtracting all operating expenses, they reported net income of $25,000,000. The income available to common shareholders (Goodyear has some preferred shareholders that get dividends first) was $18,000,000. Goodyear has 245,000,000 common shares of stock outstanding.

Goodyear also reported they have total assets of $17,629,000,000; total current liabilities of $5,929,000,000; total current assets of $9,812,000,000; inventory valued at $3,812,000,000; total liabilities of $16,880,000,000. For the entire year, Goodyear had net income of $321 million for EPS of $1.32. The assignment involves analyzing various financial ratios and metrics based on these data points to assess the company's financial health and stock performance.

Paper For Above instruction

Financial analysis of a company's quarterly and annual reports provides crucial insights into its operational efficiency, liquidity, profitability, and overall financial health. This paper evaluates Goodyear Tire & Rubber Company's financial performance based on the data reported in the fourth quarter of 2011 and the entire fiscal year of 2011, alongside projected estimates for future revenue. The analysis includes calculation of key financial ratios, assessment of market valuation, and interpretation of market reactions to financial disclosures.

1. Current Ratio

The current ratio measures a company's capacity to meet short-term obligations using its short-term assets. It is calculated as:

Current Ratio = Current Assets / Current Liabilities

Given data: Current Assets = $9,812,000,000; Current Liabilities = $5,929,000,000

Current Ratio = $9,812,000,000 / $5,929,000,000 ≈ 1.65

This indicates that Goodyear has 1.65 dollars in current assets for every dollar of current liabilities, reflecting adequate liquidity.

2. Quick Ratio

The quick ratio, or acid-test ratio, refines liquidity measurement by excluding inventory, which may not be immediately liquid:

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Inventory = $3,812,000,000

Quick Assets = $9,812,000,000 – $3,812,000,000 = $6,000,000,000

Quick Ratio = $6,000,000,000 / $5,929,000,000 ≈ 1.01

This suggests that even without inventory, Goodyear possesses slightly more than enough liquid assets to cover its short-term obligations.

3. Gross Profit Margin

This profitability ratio shows the percentage of revenue remaining after covering the cost of goods sold:

Gross Profit Margin = (Total Revenue – Cost of Revenue) / Total Revenue

Total Revenue = $5,683,000,000; Cost of Revenue = $4,815,000,000

Gross Profit Margin = ($5,683,000,000 – $4,815,000,000) / $5,683,000,000 ≈ 0.1527 or 15.27%

Indicating that Goodyear retains approximately 15.27% of revenue as gross profit after production costs.

4. Net Profit Margin

This ratio assesses overall profitability by measuring net income relative to total revenue:

Net Profit Margin = Net Income / Total Revenue

Net Income = $25,000,000; Total Revenue = $5,683,000,000

Net Profit Margin = $25,000,000 / $5,683,000,000 ≈ 0.0044 or 0.44%

Goodyear's net profit margin is quite low, indicating narrow profit margins after all expenses.

5. Total Debt to Total Asset Ratio

This ratio evaluates leverage, showing the portion of assets financed by debt:

Total Debt = Total Liabilities = $16,880,000,000; Total Assets = $17,629,000,000

Total Debt to Total Assets = $16,880,000,000 / $17,629,000,000 ≈ 0.957, or 95.7%

Goodyear is highly leveraged, with almost all assets financed through liabilities, which poses higher financial risk.

6. Market Capitalization

Market capitalization is calculated by multiplying stock price by the number of outstanding shares:

Stock Price = $13.10; Shares Outstanding = 245,000,000

Market Cap = $13.10 × 245,000,000 = $3,209,500,000

The company’s valuation based on the current share price is approximately $3.21 billion.

7. Stock Price Reaction to Revenue Announcement

Analysts expected quarterly revenue of $5.9 billion, but actual revenue was $5.683 billion, which is lower than expectations. When financial results fall short of forecasts, investor sentiment often deteriorates, leading to a decline in stock price. The discrepancy indicates the company's revenue growth did not meet market expectations, possibly raising concerns about future earnings potential and operational performance. Such surprises can trigger negative market reactions, which seem to have occurred with Goodyear’s stock price decline following the revenue announcement.

8. Rising Sales but Falling Operating Margin

Although sales increased by 12%, the operating margin declined. This phenomenon could result from several factors:

• Increased Operating Expenses: Higher costs related to marketing, research, or capacity expansion may have outpaced revenue growth.
• Pricing Pressure: To boost sales, Goodyear might have reduced prices, squeezing margins.
• Shift in Product Mix: Selling more lower-margin products could diminish overall operating margins.
• Higher Raw Material Costs: Rising input prices could erode margins despite sales growth.

Therefore, sales growth does not automatically equate to higher profitability, especially if costs rise disproportionately or pricing strategies impact margins negatively.

9. Revenue Projection and Future Performance

Expected yearly revenue: $24.53 billion. Past quarterly revenue was approximately $5.683 billion; if each of the next four quarters maintains this figure, then annual revenue would be:

$5.683 billion × 4 ≈ $22.732 billion

This is below the projected $24.53 billion, suggesting that if sales remain consistent, Goodyear might not meet the revenue estimate. To achieve the target, the company would need to grow each quarter’s revenue beyond the past quarter’s level or improve sales pace.

10. Financial Health and Investment Decision

Analyzing Goodyear’s financial statements reveals a high debt-to-asset ratio (~95.7%), which indicates significant leverage and potential risk if earnings decline or interest rates rise. Moreover, the slim net profit margin (around 0.44%) raises concerns about profitability sustainability. Despite healthy liquidity ratios, the company's high leverage and narrow margins suggest it is somewhat financially fragile, or "sick," especially in a competitive and volatile industry.

If an investor has $1,400 to invest in 100 shares at a current price of $13.10 per share, the value of the investment would be $1,310. Given the high leverage and slim margins, the decision to invest should be based on risk appetite and outlook on industry recovery. For a cautious investor, it might be better to wait for signs of improved profitability or reduced financial risk before investing heavily.

Employer factors such as industry health, economic conditions, and company-specific developments should also influence the decision. In sum, while the stock appears undervalued relative to some earnings metrics, its financial structure signals caution for potential investors.

References

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