Pirelli: Investing In Reifen Ritter Harvard Case Solution & Analysis

Pirelli: Investing In Reifen Ritter Case Study Solution

Evaluation of Investment in Markus Business with considering LOC

Evaluation could be conducted on basis of Refine Ritter’s cash flow projections, after the acquisition of loan with the line of credit of 400,00. The projections are done on the basis of the financial statements as well as on the basis of general logical assumption for Refine Ritters, which are provided in the case Exhibits. The line of credit is adjusted in the projected balance sheet with an increase in the amount of inventory and account payable.

The projected balance sheet with the consideration of the line of credit is provided in appendix 7. On the basis of these financial statements, certain ratios have been calculated, which are provided in the appendix 8.

It could be seen from the appendix 8 that the financial performance is more efficient with the consideration of LOC. However, through the evaluation of Pirelli’s cash flow with the consideration of LOC, it could be seen from appendix 9 that the LOC along with the Loan amount has lower rate of returns i.e., 85%. Therefore, it could be concluded that the firm should provide the loan to Mr Markus. (Brigham, 2016)

Recommendations

Pirelli is recommended to provide the loan to Markus, because Markus’s financial projections show a healthier impact on its statements after gaining the loan. Loan should be awarded because at the end; it will benefit Pirelli by increasing its sale up to 50% in future. Markus should not place the condition of  the increase in the credit facility because his leverage ratios are much lower as compared to industry, and the company’s days in payables show an increasing trend, unveilingits incapability to pay to its debtors. Markus’ ability to increase hia volume in sale is great, but after being enlightened to his weak capability in paying his debt, Markus shouldn’t be provided with the increase in his loan’s credit line.

Conclusion

It is concluded that Markus is a potential buyer of Pirelli, and Pirelli is not in the condition to lose its long term customer, who is covering a major chunk of its German Market share. Markus is good at selling the goods in large volume, which is why Pirelli should provide Markus with the loan of 1million, but should not limit its line of credit. Markus’s leverage ratio is not good as compared to the industry’s bench mark, and it is found that Markus’s ability to pay his debt are lower, after analysing his financial statements critically.

 

Appendices

Appendix 1:

SWOT Analysis
 PirelliReifen Ritter
StrengthsWorld’s top tire manufacturers

Strong financial position

Well-known tire expert in the region

Large amount purchases

Profitable client for Pirelli with low discounts as compared to bigger customers

WeaknessesFlat tire market

Stagnant revenue growth i.e. 2%

Huge dependence on one customer i.e. Markus

Lack of business skills

Weak Personal Profile

 

 

OpportunitiesExploration of potential markets in Germany

High growth opportunities in the smaller dealer’s business i.e. Reifen Ritter

Achievement of Revenue growth

Business expansion through purchasing warehouse

50% revenue growth in 3 years

Low insurance coverage due to lack of collateral

High financial leverage

 

ThreatsRisk of losing potential buyer

Increase in financial exposure

Risk of default

No compliance with Pirelli’s

Low insurance coverage due to lack of collateral

 

Increase in financial exposure

Increase in business complexity

Appendix: 2

ANALYSIS FOR 1000,000 LOAN
 Actual% of Sales12345
200020012002200320042005
Sales2042100%23382676306335064014
Growth11%0%14%14%14%14%14%
COGS167682%19192196251428783294
Gross Margin366419480549628719
Operating Expenses
Personnel (Including Additional Personnel)1085%149192237185212
Marketing and Sales412%4754627081
Other Operating Expenses221%2529333843
Total Operating Expenses171221274332294336
EBITDA195198206218335383
Depreciation33535353535
EBIT1919%163170182299348
Financial Expenses338462514029
EBT1588%79108131259319
Taxes6742%334655110135
Profit After Tax925%456275149184
Dividends4650%2331387592
RE462331387592

Appendix 3:

ANALYSIS FOR 1000,000 LOAN
2000% change20012002200320042005
 ASSETS   
 Cash                5 –           177–           330–           470–           536–           567
 Inventory             96515%         1,110         1,276         1,468         1,688         1,941
 Acc. Receivables              67                67               67               67               67               67
 Total current assets           1,037      1,000      1,013      1,065      1,219      1,441
 Fixed assets net             93          1,056         1,020            985            949            914
 Total Assets           1,130        2,055       2,033       2,049       2,168       2,354
 LIABILITIES   
 Short term Bank                  Interest rate:             1648%            150            138            127            116            107
 Acc. Payables Pirelli             18516%            215            251            292            339            395
 Acc. Payables others             18616%            217            252            294            342            398
 Total current liabilities           535        582       641       712       798       900
 Bank             300         300         300         300         300         300
 Pirelli             100          1,000            821            632            432            222
 Total Long-term debt     Interest rate:           400     1,300    1,121       932       732       522
 Total Liabilities              935        1,882       1,762       1,644       1,530       1,422
 EQUITY   
 Owner’s equity & reserves             14713%            193            262            362            499            711
 Retained Earnings              46           69         100         138         212         304
 Total Equity              193           262          362          499          711       1,015
 Total Liabilities & Equity           1,128        2,144       2,123       2,143       2,241       2,437

Appendix 4:

20012002200320042005
Cash Beginning5-177-330-470-536
Cash Flows From Operating Activities:
Net Income456275149184
Add: Depreciation3535353535
Net Cash Flows From Operating Activities8198111185219
Cash Flow From Investing Activities:
Purchase of Warehouse-1000
Net Cash Flows From Investing activities-1000    
Cash Flows From Financing Activities:
Loan1000
Interest Payment-84-62-51-40-29
Principal Payment-179-189-199-210-222
Net Cash Flows From Financing Activities737-251-251-251-251
Cash Ending-177-330-470-536-567

Appendix 5:

ANALYSIS FOR 1000,000 LOAN
 Ratios   B.MARK 200020012002200320042005
 PROFITABILITY RATIOS
 NET MARGIN        15.00          0.09           0.07           0.06           0.06           0.09           0.09
 NET PROFIT MARGIN          7.00          0.05           0.02           0.02           0.02           0.04           0.05
 FINANCIAL RATIOS
 LEVERAGE RATIO          1.50          0.78           7.19           4.87           3.29           2.15           1.40
 W/C     502.00      417.23      372.44      352.84      421.36      540.84
 CURRENT RATIO          1.94           1.72           1.58           1.50           1.53           1.60
 OPERATING RATIOS
 DAYS OF RECIEVABLES              20          0.03         10.46           9.14           7.98           6.97           6.09
 DAYS OF INVENTORY              52        66.71      211.13      212.10      213.08      214.07      215.06
 DAYS OF PAYABLES              70     116.51      110.80      106.51      103.37      101.17         99.71
 YEARLY INVENTORY TURNOVER                7          1.74           1.85           1.84           1.83           1.82           1.82

Appendix 6:

ANALYSIS FOR 1000,000 LOAN & 400,000 CREDIT AWARDED
 Ratios   B.MARK  20012002200320042005
 PROFITABILITY RATIOS
 NET MARGIN        15.00          0.09           0.08           0.08           0.07           0.10           0.10
 NET PROFIT MARGIN          7.00          0.05           0.05           0.04           0.04           0.06           0.06
 FINANCIAL RATIOS
 LEVERAGE RATIO          1.50          0.44           1.64           1.60           1.56           1.48           1.39
 W/C      417.23      369.70      343.75      401.26      503.75
 CURRENT RATIO           1.53           1.34           1.24           1.22           1.22
 OPERATING RATIOS
 DAYS OF RECIEVABLES              20         10.46           9.14           7.98           6.97           6.09
 DAYS OF INVENTORY              52      249.18      283.57      313.92      340.73      364.46
 DAYS OF PAYABLES              70      148.85      178.43      205.53      230.38      253.23
 YEARLY INVENTORY TURNOVER                7           0.51           0.39           0.35           0.32           0.29

Appendix 7

ANALYSIS FOR 1000,000 LOAN & 400,000 CREDIT AWARDED
 Actual% of Sales12345
200020012002200320042005
Sales2042100%23382676306335064014
Growth11%0%14%14%14%14%14%
COGS167682%19192196251428783294
Gross Margin366419480549628719
Operating Expenses
Personnel (Including Additional Personnel)1085%149192237185212
Marketing and Sales412%4754627081
Other Operating Expenses221%2529333843
Total Operating Expenses171221274332294336
EBITDA195198206218335383
Dericiation300000
EBIT1919%198206218335383
Financial Expenses3300000
EBT1588%198206218335383
Taxes6742%848792142163
Profit After Tax925%114118125193221
Dividends4650%57596396110
RE4657596396110

Appendix 8

ANALYSIS FOR 1000,000 LOAN & 400,000 CREDIT AWARDED
2000% change20012002200320042005
 ASSETS   
 Cash            5 –          177–          330–          470–          536–          567
 Inventory        96515%        1,310        1,706        2,162        2,686        3,289
 Acc. Receivables          67               67              67              67              67              67
 Total current assets      1,037     1,200     1,443     1,759     2,218     2,789
 Fixed assets net         93         1,056        1,020           985           949           914
 Total Assets      1,130       2,255      2,463      2,744      3,167      3,703
 LIABILITIES   
 Short term Bank                  Interest rate:        1648%           150           138           127           116           107
 Acc. Payables Pirelli        18516%           415           683           995        1,358        1,780
 Acc. Payables others        18616%           217           252           294           342           398
 Total current liabilities      535       782    1,074    1,416    1,816    2,286
 Bank        300        300        300        300        300        300
 Pirelli        100         1,000           821           632           432           222
 Total Long-term debt     Interest rate:      400     1,300    1,121      932      732      522
 Total Liabilities         935       2,082      2,194      2,347      2,549      2,807
 EQUITY   
 Owner’s equity & reserves        14713%        1,203        1,271        1,371        1,509        1,721
 Retained Earnings     1,056          69        100        138        212        304
 Total Equity      1,203       1,271      1,371      1,509      1,721      2,025
 Total Liabilities & Equity      2,138       3,354      3,566      3,856      4,270      4,832

 

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