Tire City Case Analysis
Executive Summary
Tire City, Inc. has petitioned MidBank for a loan in order to expand their business, and build a new warehouse. Through the financial statement reporting and the numbers that have been presented to me, I believe that this is a sound investment. The growth percentage of 20 percent per year is conceivable, if business stays as it currently is. The amount of debt that would need to be financed for this expansion is palatable, and well within the normal ranges for these sort of projects. Moreover, the company has very solid net working capital and leverage ratios. All of these factors lead me to believe that this will be a profitable investment for the bank. The one issue that I had was in 1996 when Tire City capped their inventory, and it caused a large cash inflow on their financial statements because of the positive change. This could be due to many different factors, but this bears monitoring and questioning when the bank is doing their due diligence with Tire City. I have scheduled a meeting with Mr. Martin in order to inquire about why this inventory anomaly has occurred. I will report back as soon as possible.
Analyzing Tire City, Inc.’s Financial Health
Profitability
At first glance, Tire City, Inc. seems to be doing very well for itself. The historical average of return on sales indicates that for every dollar they take in, that approximately five percent of that dollar is profit. That is not a number that will blow investors away, but it is also not decreasing so this indicates that the company is becoming more efficient. Likewise, the return on invested capital is increasing. This shows us that the company is earning 20 percent on their investments where their cost of capital is only 10 percent through financing activities. Tire City’s return on equity is very high throughout this period, which indicates that the company is generating between 23 and 24 cents per dollar that a shareholder invests. That is an outstanding return to
Tire City, Inc. has petitioned MidBank for a loan in order to expand their business, and build a new warehouse. Through the financial statement reporting and the numbers that have been presented to me, I believe that this is a sound investment. The growth percentage of 20 percent per year is conceivable, if business stays as it currently is. The amount of debt that would need to be financed for this expansion is palatable, and well within the normal ranges for these sort of projects. Moreover, the company has very solid net working capital and leverage ratios. All of these factors lead me to believe that this will be a profitable investment for the bank. The one issue that I had was in 1996 when Tire City capped their inventory, and it caused a large cash inflow on their financial statements because of the positive change. This could be due to many different factors, but this bears monitoring and questioning when the bank is doing their due diligence with Tire City. I have scheduled a meeting with Mr. Martin in order to inquire about why this inventory anomaly has occurred. I will report back as soon as possible.
Analyzing Tire City, Inc.’s Financial Health
Profitability
At first glance, Tire City, Inc. seems to be doing very well for itself. The historical average of return on sales indicates that for every dollar they take in, that approximately five percent of that dollar is profit. That is not a number that will blow investors away, but it is also not decreasing so this indicates that the company is becoming more efficient. Likewise, the return on invested capital is increasing. This shows us that the company is earning 20 percent on their investments where their cost of capital is only 10 percent through financing activities. Tire City’s return on equity is very high throughout this period, which indicates that the company is generating between 23 and 24 cents per dollar that a shareholder invests. That is an outstanding return to