Tire City Case

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Introduction

Tire City, Inc is a growing distributor of tires in the Northeastern part of the United States. Tire City, Inc is positioned in eastern Massachusetts, southern New Hampshire and northern Connecticut. Tire City, Inc distributes its product through a chain of 10 stores and a central warehouse outside Worcester, Massachusetts. In the past three years, Tire City has grown at an annual compound rate of 20% which was attributed to its excellent reputation for service and competitive pricing. Due to its growth, Tire City is currently at maximum capacity in its warehouse and is considering expanding its current warehouse facility to accommodate service levels. Jack Martin and Abeer Mandil are in the process of presenting the financial position of the company to their bank in order to request a five-year loan for the expansion.

Case Analysis

1-Tire City, Inc. Financial Health for 1995

Liquidity

|Liquidity Ratios |1993 |1994 |1995 | |Current ratio |2.03 |1.92 |2.03 | |Quick ratio |1.32 |1.29 |1.35 | |Cash ratio |0.22 |0.21 |0.22 | |Working capital ratio |0.36 |0.34 |0.37 |

Liquidity ratios are used to measure the company ability to meet its current obligations. Tire City Inc. has improving current ratio; it increased from 1.92 in 1994 to 2.03 in 1995. Moreover, quick, cash and working capital ratios increased slightly in 1995. Overall the company has good cash flow and stable position during 1993 to 1995.

Leverage

|Leverage Ratios |1993 |1994 |1995 | |Debt ratio |50.33% |48.03% |44.17% | |TIE coverage |12.14 |18.16 |23.50 | |L.T Debt ratio |0.23 |0.18 |0.13 | |Debt/Equity ratio |1.01 |0.92 |0.79 | |Equity multiplier |2.01 |1.92 |1.79 |

Lower debt ratio makes it easier for the Tire City Inc to borrow additional funds without Raising equity capital. Tire City Inc. has reduced its debt ratio from 48.03% in 1994 to 44.17% in 1995. Also, Tire City has improved time interest earned coverage from 18.16 in 1994 to 23.50 in 1995. The increased TIE coverage is due to the higher net income and the decreased interest expense in 1995 than 1994. L.T Debt and Debt/Equity ratios has decreased slightly in 1995 than 1994 due to the decrease in the long term debt from $875,000 in 1994 to $750,000 in 1995 (see appendix 1).

Asset Management

|Asset Mgmt Ratios |1993 |1994 |1995 | |Inventory Turnover |5.79 |6.47 |6.22 | |Receivable Turnover |6.38 |6.58 |6.44 | |Payable Turnover |9.05 |8.98 |9.45 | |FA Turnover |8.56 |8.93 |9.65 | |TA Turnover |2.47 |2.60 |2.62 | |Days Receivable OS |57.24 |55.50 |56.71 | |Days Inv OS |63.09 |56.39 |58.72 | |Days Payable OS...
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