Tire City Inc Case Solution

1. Evaluate Tire City’s past performance and current financial health. Do a quantitative analysis of the company’s past financial performance.

Profitability 

During the years 1993-1995, sales at Tire City increased significantly. Sales rose by 25.42 percent in 1994 and by 15.48 percent the following year (in comparison to the year before). Every year, they've seen an increase in their profit margin. As of this year, their profit margin is 5.06 percent compared to 4.81 percent in 1993, and 4.90 percent in 1994. Cost of goods sold and interest expenditure both fell as a percentage of sales, both of which helped boost the company's profit margins. The tyre retailer's gross profit margin was 41.55 percent in 1994, but it increased to 42.05 percent in 1995, suggesting that it is either charging higher prices or finding lower-cost tyre suppliers. In 1994, the tyre retailer's gross profit margin was 41.55 percent. Since the firm has begun making payments on its initial warehouse loan for $125,000, its interest expenditure as a percentage of sales has fallen. This is because the company is paying off the debt.

Asset Turnover 

The ratio has risen to 2.47x, 2.60x, and 2.62x in the year 1993, 1994, and 1995 respectively. In 1995, the fixed asset turnover grew from 8.93x to 9.65x. To put it another way, plant and equipment as a proportion of sales has fallen. A few extra expenditures in plant and equipment may have been made, but the company's overall fixed asset turnover was boosted by the increase in income. The accounts receivable turnover witnessed a decrease from 6.58x to 6.44x from the year 1994 to the year 1995. Consequently, the collection time was extended from 55.5 days in 1994 to 56.7 days in 1995 as a consequence of this increase.

Financial Leverage 

Tire City's assets-to-equity ratio has been continuously decreasing since it reached its all-time high in 1993, going from 2.01 to 1.92 to 1.79 in 1995. As a direct consequence of this, they are lowering the amount of danger they face and enhancing the security of their finances. Tire City has sufficient financial resources to effectively manage its day-to-day operations and make progress in reducing the outstanding debt on the loan for the warehouse. Its compound annual interest rate has been climbing steadily since 1994 when it was at 18.16 percent and reached an all-time high of 23.50 percent in 1995. This has been made possible in part by improvements in both net income and interest expenditures. In 1994, the cash conversion cycle at Tire City lasted for 71.2 days. In 1995, however, it lasted for 76.8 days. When compared to 1994, this is the result of a larger amount of time spent collecting payments and a shorter period spent making payments.

Liquidity 

The current ratio of the company was 2.03 whereas the quick ratio, which shows the liquidity of the company after subtracting the inventory, was 1.35 which can be considered as good. Their operational cash flows in 1994 and 1995 were $989,00, which means they have no problem paying their operating costs. The drop in cash flow was caused by an increase in inventory expenditures to keep up with the company's sales growth.

Financial Statements 

In 1994, Tire City required $1,302,000 in additional assets, which was reduced to $1,101,000 in 1995, based on its financial statements from 1993 to 1995. Accounts receivable rose by $283,000 in 1994 and by $115,000 in 1995 as a consequence of unanticipated occurrences, whereas retained earnings rose by $797,000 in 1994 and $950,00 in 1995. In 1994, they had a $222,000 EFN, and in 1995, they had a $36,000 EFN. Finally, between 1994 and 1995, the long-term debt of the corporation was decreased by $125,000.

Tire City's financial status has improved since 1993 as a result of its success, as can be seen in the chart below. By keeping its expenditures as low as possible, the firm was able to increase sales and net income, as can be seen by the shift in ratios.

2. Prepare a pro forma income statement, balance sheet, and cash flow statement for the company for 1996 and 1997.