Tire City Case Study

Perspectives on Management Assignment 2

• Read: “How To Read a Financial Report” .  Please focus on pages 1-36.  https://web.stanford.edu/class/msande271/onlinetools/HowToReadFinancial.pdf
• Read:  TIRE CITY (from the HBS Coursepack)

• Read the case and use the "Total Business" framework as described by Ram Charan in Chapter 9 of "What the CEO Wants You to Know" to try and understand: 1. Business Picture - what is going on with the business? 2. Financial picture - what is going on with their financials?

• Prepare the following for Tire City and be ready to discuss in class:

• How is Tire City doing?  Is the Company financially healthy?
• What were sales for the past 24 months? Next 24 months?  Why are sales growing?
• What are the gross and net margins? What is the difference between them? Are they healthy margins?
• What is the inventory and asset velocity?
• What is the Return on Assets?
• How much cash is the company generating?

Why do they need to borrow money?  What are the risks?

1995 Sales→ $23,505,000

1995 NI→ $1,190,000

past 3 years→ sales grew at compound annual rate in excess of 20%

*due to excellent service, competitive pricing which led to high levels of customer satisfaction

1991→ loan from MidBank

*payments of $125,000 (original loan→ $1,500,000)

*end of 1995→ $875,000 left (7 years left)

*also est. line of credit (haven’t borrowed yet)

next 18 months→ $2,400,000 invested in expansion ($2,000,000 to be spent in 1996)

*no depreciation until completion in 1997

~could recognize 5% of warehouse total cost as dep. exp.

have to dec. inventory levels to $1,625,000 by end of 1996 (were $2,190,000 at end of 1995)

*cutback lasts till construction completion in 1997

~would return to normal levels proportionate to sales by end of 1997

cash balance→ maintain at 3% of sales

TCI taxes are higher than 35% corp. tax because of local tax

TCI discuss borrowing from MidBank to finance warehouse expansion and business growth

*borrow in 2 separate parts on as-needed basis (one in 1996, one in 1997)

*repay in 4 equal annual installments

~1st payment→ one year after construction done (1998)

~interest rate→ 10%

projection→ 20% increase in sales each year (1996 and 1997)

*1993→ $16,230,000

*1994→ $20,355,000

*1995→ $23,505,000

*1996→ $28,206,000

*1997→ $33,847,000

Cash

*1993→ $508,000

*1994→ $609,000

*1995→ $706,000

ROA = NI/total assets

*1993→ 11.85%

*1994→ 12.75%

*1995→ 13.25%

ROE = NI/SE

*1993→ 23.87%

*1994→ 24.53%

*1995→ 23.73%

Dividend payout ratio→ dividend/NI

*1993→ 20%

*1994→ 20%

*1995→ 20.2%

Gross profit→ revenue - COGS

*1993→ $6,800,000

*1994→ $8,457,000

*1995→ $9,893,000

NI→ revenues - all business costs (depreciation, interest, taxes, etc.)

*1993→ $780,000

*1994→ $997,000

*1995→ $1,190,000

The increasing proportionate difference between GP and NI is alarming

gross P&E

*1993→ $3,232,000

*1994→ $3,795,000

*1995→ $4,163,000

net P&E (gross P&E - depreciation)

*1993→ $1,897,000

*1994→ $2,280,000

*1995→ $2,435,000

profit margin (NI/Net Sales)

*1993→ 4.8%

*1994→ 4.9%

*1995→ 5.1%

These profit margins are low.

current ratio (CA/CL)

*1993→ 2.03