The world tire market was equal to 80 billion dollars in 2005. That is to say that each year more than 1 billion tires are sold for cars and light trucks. 75% of the sales are for European, North American and Asian countries. Michelin is the leader of this market in those areas because it deals with about 75% of the sales. The tire market is growing market: a growth of about 3% each year. The three largest tire manufacturers account for 55% of the world market. Michelin is the world number one tire manufacturer. It owns 20% market share. The purpose of this report is to study the financial health of Michelin. For this, first we will make an historical analysis of the firm over the last four years, then analyze the debt structure and at last, study their dividend policy. This summarized board of figures show us that revenues of Michelin are quite steady during the last 4 years. However, there is a slight increase in retained earnings. As regards the stock price for Group Michelin, the figures in the board are the last values of each year. To have a best view of the stock price variations, there is a graph below of the stock price of Michelin during the five last years.
[...] By reducing the debt, Michelin has less tax shields. The company increases also its solvency and is more attractive for investors. The capital structure of the firm is the firm's combination of different securities that overalls its market value and that had the greatest appeal to investors. The choices of firm's financing mix could be defined according to the life cycle. Assuming that Michelin is at the mature growth of the growth life cycle (in Europe and North America), the separation between stockholders and managers is growing and the use of debt is slowing down because the firm has low and more predictable investment needs (Damodaran, 2001). [...]
[...] It is useful to value the financial health of Michelin, to study its profitability. Some ratios help us to analyse it. First, we can calculate the Gross Profit Margin: Sales - COGS Gross Profit Margin = Sales margin All the figures are positive and we can note a relative increase. The gross profit margin shows us that Michelin is able to cover its operating expenses and yield to a good profit. Second, we can calculate the Net Profit Margin: Gross Profit Margin - taxes Net Profit Margin = Sales margin During the four years, the net profit margin is positive, with variations. [...]
[...] How highly is the Group Michelin valued by investors? Let's compute some ratios in order to analyse the value by investors: Dividend yield and the P/E Ratio. The dividend yield is calculated as follow: Dividend per share Dividend yield = Stock price yield The dividend yield is simply its dividend proportion of the stock price. The return to an investor comes in two forms: dividend yield and capital appreciation. Here, relatively low dividend yield may indicate that investors are not demanding a high rate of return or that they are expecting rapid dividend growth with consequent capital gains. [...]
[...] Another clue to explain the short term investment increase: In 2004, the financial investment of Michelin was limited to minority interest acquisitions. For example, Michelin has acquired stake in Apollo tires for 30 million dollars and 10% stake in Gajah Tunggal (the main Indonesian manufacturer) for 25 million of dollars. Michelin has reimbursed in 2004 loans and reduced confirmed credit lines in order to optimize interest expenses. Michelin is currently continuing its strategy of reducing the debt. Michelin seems to prefer variable rate rather than fixed rate for its interest payments on its debt. [...]
[...] It is a good financial management. To sum up, Michelin does not borrow so much money to finance the company, the managers prefer use equity. How liquid is the Group Michelin? Now, let's compute the main liquidity ratios. They show us how liquid the group Michelin is. For this we are going use two different ratios: Net Working Capital to Total Assets Ratio and the Current ratio. To calculate the Net Working Capital of Michelin, we compute the current assets less current liabilities. [...]
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