Timken company case | Business & Finance homework help
Timken is a large industrial company that has recently been considering an acquisition. With this in mind, Timken should be concerned about losing its investment-grade rating if it decides to finance the acquisition with debt, as increasing the amount of debt on its balance sheet could lead to a decrease in its credit ratings due to increased leverage and increased risk of default.
When evaluating Timken’s financial ratios compared to other industrial firms in 2002, one can see that Timken had higher profitability metrics such as Return on Equity (ROE) and Return on Assets (ROA). It also had lower levels of leverage than industry peers when assessing Debt/Equity and Total Liabilities/Total Assets ratios. This shows that at the time, Timken was performing relatively well financially compared to other industrial companies.
If Timken were to finance the acquisition with debt instead of equity or cash, however, these ratios would likely change significantly. Leverage would increase significantly and ROE and ROA would likely decline as more interest expense was being incurred. In addition, liquidity measures such as current ratio and quick ratio could also drop depending on how much cash flow is generated from operations post-acquisition.
Overall, due to these potential impacts it is important for Timken to consider all factors before deciding whether or not they should pursue the acquisition through financing with additional debt. They must ensure that their credit ratings will not be adversely affected by additional leverage resulting from taking up more loans for this purpose.