Shurstop

Shurstop Tire & Rubber Co., Inc.
Financial Ratio Analysis

Early in February, 1086, Victor Valdez, treasurer el Shurstop Tire & Rubber Company, Inc. - asked the assistant treasurer, Jeanine Jackson, to analyze the corporation's recordes to determine what financial problem might arise during 1986.

Shurstop is one of the twelve largest tire manufactures in the United States. Ninetypercent of Shurstop's sales and about 88 percent of its operating profits are deriver from tire sales. Most of its tires are sold in the replacement market with significant sales to major retailers which sell tires under their store brand. Two-thirds of Shurstop's tire sales are for passenger cars with the remainder going to the truck, bus, and industrial vehicle markets.

The businessslowdown of 1981-82, the slump in new car sales, and excess capacity in the industry put pressure on the profits of many tire manufacturers. Many costumers had postponed purchases of new automobiles during the recession, but there was no boom in replacement tire sales. Conditions improved significantly in 1984, however. A number of tire manufacturers showed substantially higher profits in 1984 comparedwith 1982 and 1983.

Prospects for 1986 were uncertain for replacement tire manufacturers. The high level of new cars sales had resulted in the retirement of many older cars which otherwise would have been candidates for replacement tires. Although the level of domestic new car sales might fall in 1986, lower interest rates and special promotions might result in another big sales year forauto manufacturers.

One bright spot for tire manufacturers was the importance of radial tires both as original equipment and as replacements. Gas shortages in the 1970s followed by sharply escalating gasoline prices spurred the move to radial tires as fuel-saving devices. Radial tires sell for higher then bias-belted tires.

From the tire manufacturers' point of view, the bad news aboutradial tires is that they last longer then bias-belted tires. In the 1970s an auto owner could expect to buy five or six sets of replacement tires over the life of a car. Today three sets of radial normally run well over 100, 000 miles. Rumors in the industry are the one of the major tire manufacturers will introduce a radial tire industry are that one of the major tire manufacturers willinrtoduce a radial tire guaranteed to last for the life of the car.

Shurstop had not been of the early producers of radial tires, ans this had cost the company some sales. However, Shurstop gained knowledge from other manufacturers' experience in production of radials, and this helped when Shurstop introduced its radial tire line in 1975. After a shaky start, the company made the transition, andcurrently most of its passenger-car tire production is in radials.

A factor wich could contibute to increased replacement tire sales is the use of undersized spared tires by American auto manufacturers. This should result in many replacement tire sales being in sets of four. Prior to this development, many consumers had purchased there new tires and used the spared tire, keeping the best ofthe used tiresfor spare.

New income for Shurstop has fluctuated in recent years as have divided payments to common stockholders. Dividends of $ 480, 000 have been paid annually on the corporation's preferred stock which was sold in the 1960s. Directors have declared dividends in recent year (see Exhibit 1). Although directors were reclutant to do so, the dividends for common stockholderswere slashed in 1982. The company's common and preferred stocks are listed on the New York Stock Exchange, although trading in the preferred stock is relatively inactive.

With this background, Jeanie Jackson began her analysis for Mr. Valdez. Although she had access to internal company records, Jeanine decided to star with the company's balance sheets and income statements for 1985 and...