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3 Reasons To Avoid Goodyear

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

Doing both of things together will help you earn higher than average investment returns and build your wealth.

There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.

The key to continue compounding your capital is to keep investing well over time… Combine this with dividends and you’re well on your way to building a retirement account you can live off.

And this is huge part of things.

But another huge part of this is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.

Both things are necessary to build wealth. But most only think of investing well. 

Because of this, today I want to show you 3 Reasons To Avoid Goodyear.

3 Reasons To Avoid Goodyear Stock

  1. It’s Got A Lot of Debt

As of the most recent quarter Goodyear’s (GT) balance sheet is made up of 81.9% of total liabilities.  And its debt to equity ratio is 2.3.

I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term.  This helps insure I lose as little money as possible over time.

Typically, this means I invest in companies that have little to no debt compared to their cash and equity.  For example, I like to invest in stocks that have debt to equity ratios below 1.

Its debt to equity ratio of 2.3 may not seem like a big deal… But let me put this into some context for you.

As of this writing, Goodyear’s current market cap is $2.3 billion.

And it has total short and long term debt of $7.9 billion.

In other words, its debt levels are 3.4X higher than the entire estimated worth of the company based on its value in the market.

Goodyear has an enormous amount of debt which makes it extremely risky.

This is illustrated further with its interest coverage ratio…

As of this writing Goodyear has a negative 2.4 interest coverage ratio… Meaning it’s not earning enough profits to cover the interest payments on its debt.

Any number above 1 means the company is earning enough profits to cover its debt payments.

When a company can’t pay its debt it either issues more shares or debt to raise more cash to cover these payments… Or it goes bankrupt.

And in the last year Goodyears had to issue more debt to stay alive.

To make this even worse its burning through cash fast as I’ll show you below.

2. It’s Not Producing Enough Profits and Cash Flow

In the most recent quarterly data Goodyear was unprofitable on an operating income, net income, and free cash flow basis.  

These all due in large part to negative affects of the coronavirus… Which I’ll talk about more in the next section.

Its operating profitability margin in the trailing twelve months (TTM) is negative 1.1%.

Its net income profitability margin in the TTM period was negative 7.7%.

And its free cash flow to sales (FCF/Sales) margin in this same time was negative 0.4%.

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.

For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.

And I look for stocks FCF/sales margins above 5% on a consistent basis.

Why these numbers?

Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit and net margins above 10% over long periods of time.

And far fewer than 5% of all companies consistently have higher FCF/sales margins than 5% on a consistent basis too.

When a company surpasses these thresholds, it means the company is a great operating business.

And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.

But if a company doesn’t surpass these thresholds; in time, this leads the company to having less money to reinvest in the business to continue competing well.

The largest problem of this in the immediate future though is that this negative profitability affects Goodyears ability to make its debt payments which I talked about above.

These show that Goodyears business is getting hurt by the coronavirus… Which gets us to reason #3 to avoid its stock.

3. Uncertainty Related To The Coronavirus

This all circles back to the beginning and the coronavirus.

Air travel, hotels, and restaurants are still getting hammered.

But so are many other industries worldwide.  And anything related to the car industry is getting hurt right now.

On July 31st, 2020 Goodyear released its up to date quarterly financial records… And they weren’t good.

Overall sales volume fell 45% from the year to year period.

Revenue dropped 41% to $2.1 billion in the 2nd quarter of 2020 from $3.6 billion in the 2nd quarter of 2019.

Gross margin fell from positive 21.4% in the 2nd quarter of 2019 to negative 3.4% in the 2nd quarter of 2020.

Operating profits fell 297% to negative $431 million in the 2nd quarter of 2020 from positive $219 million in the 2nd quarter of 2019.

Net profits per share fell to negative $2.97 per share in the 2nd quarter of 2020 from positive $0.23 per share in the 2nd quarter of 2019.

And this all led Goodyear to suspending its dividend going forward.

According to Goodyears own estimates, it expects similar results for at least the rest of 2020 because of the coronavirus.

This all due to people driving and flying less… Which means people are replacing their tires on cars and companies are replacing tires on airplanes less.

This means lower revenue, profits, and cash flow for the foreseeable future… Especially since new cases of the coronavirus being reported are still sky high as of this writing.

And this will cause issues in paying its debt which could put the company into bankruptcy in a worst-case scenario.  Or leading the company to taking on more debt – if it can even do this due to its already large debt load – in a better scenario.

Neither of which are good options when you’re burning through cash and already have a huge amount of debt.

For these reasons I recommend you stay away from Goodyear stock.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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