Michelin : financial case study

Résumé du document

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.

Extraits

[...] To Michelin, since 2002, it is lower than 1 and this ratio is still decreasing. So, the Group uses more and more equity to finance projects inside the firm, and less and less debts. It is a good position for Michelin. To comfort our analysis of the Group, we can use the Total Debt Ratio: Total liabilities Total Debt Ratio = Total assets This ratio shows us how much the total assets are financed thought debts. All the ratios are lower than which is good for the firm. [...]

[...] Nonetheless, Michelin has to focus more on Asian countries such as Japan where there are many opportunities to develop. But Michelin's status is also linked to the fluctuation of raw materials and of the currencies. So, it depends on external factors which it can't cope with. Bibliography [Internet] Available from: [Accessed on 17th May] Michelin, (2005), Annual report 2004 (2005) ABC listing [Internet] Available from: [Accessed on 11th May] (2005), [Internet] Available from http://finance.yahoo.com/9/hp?s+ML.PA> [Accessed on 19th May] Brealey and Myers (2003), Principles of corporate finance, seventh edition. Brealey and Myers (1991), Principles of corporate finance, fourth edition. [...]

[...] And Michelin pays in the common way - irregular cash dividend. In recent ten years, the net dividend per share keeps the growing trend, despite of the slight decline of total dividend during 1999-2001. The dividend proposed reflects not only the substantial improvement of Michelin's results but also its faith in the company's long-term prospects. It also takes into account the changes in dividend taxation. After last year's dividend pause, this increase could put Michelin up top among the main large companies. [...]

[...] It allows Michelin to find new lenders in the future. It also decreases the shareholders' return on their investment (less risky). In addition to that, the ratio is under which shows that the company has less debt than assets, which reduces the risk for investors. Capital structure analysis of the firm from different points of view Stakeholders' point of view: For debt holders (who hold bonds): The fact that Michelin decreases its debt reduces the default risk (risk of defaulting on its debt) of Michelin( it is better for debt holders; For shareholders (who hold shares): Reducing the debt is also good from the stockholders' point of view. [...]

[...] 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). [...]