Tire City, Inc.

(TCI) has performed well historically, maintaining an approximate

earnings
retention ratio of 80% and a return on equity of approximately 23% from 1993 to 1994
(Exhibit 3).
Though the earnings retention ratio dropped slightly as the years progressed, there
has not been a large
enough decrease to suggest a significant amount of money is being diverted from the
business to
shareholders in the form of dividends. This can be further seen in the steady levels of
dividends to net
income ratios and retained earnings to net income ratios across the last three years.
Tire City, Inc. has
shown consistent and gradual growth in profitability with growth year over year from
1993-1995
(Exhibit 3). TCI’s financial leverage decreased YOY, but not by a significant amount
since there’s only
been a .22 decrease overall since 1993 (Exhibit 3). TCI's net margin ratio and return on
assets (ROA) have
seen small gains over the last three years. However, looking at TCI’s ratio of inventory
to sales and asset
turnover ratio, you will see a YOY decreases trending. This speaks to the need for TCI
to expand the
operation as we have reached maximum capacity at the warehouse in its current state.
It stands to
reason that updates to the TCI warehouse should foster growth amplified in TCI’s
inventory to sales ratio
and net income ratio. This should, in turn, facilitate more rapid growth in TCI’s overall
ROA and
profitability. Finally, in comparing the pre-tax return on sales against the tax effect, it’s
clear that some
profitability and growth can be attributed to TCI’s ability to influence the tax rate,
rather than operating
efficiencies. The pre-tax return on sales grew just under 1% from 1993 to 1995, while
the tax effect
dropped 4% in 1994 and has grown marginally just under 1% since then. This further
underscores the
need for the warehouse expansion, while highlighting that a higher operating income
combined with
TCI’s ability to influence the tax effect should result in significant growth in overall
profitability.
Cost estimates for TCI warehouse expansion and improvements to accommodate
continued
growth are $2,400,000. TCI is requesting a loan from MidBank in the amount of
$1,000,000 with
interest set at 10% per year and repayment in four equal annual installments beginning
1998. We
estimate the loan amount needed in 1996 to be $366,000 and $613,000 in 1997
totaling $979,000. A
loan of $1,000,000 will allow $21,000 to cover contingencies in our warehouse
expansion. The additional
$1,400,000 needed for this project will be drawn in part from TCI cash reserves created
in 1996 by
planned inventory reduction required during the warehouse expansion. Our calculated
forecasted
inventory for 1996 (based on historically supported 9.3% sales) would be $2,623,000.
Total inventory
costs for 1996 will be limited to $1,625,000, thereby freeing up $998,000. We feel the
additional
$402,000 needed the year following to complete the warehouse expansion can be
covered by income
from operating activities given forecasted levels of growth.
TCI has demonstrated a sustained competitive advantage among competitors in our
geographical area maintaining growth in sales by 20% compounded over the past 3
years (Exhibit 1).
This has been achieved with desirable product selection, competitive pricing and a
reputation for
excellent service. TCI feels the market for our products and services is not yet saturated
in the areas
served by existing stores and forecasts similar growth in the years ahead (Exhibit 2).
Our current loan,
originated in 1991, is in good standing and future repayment will not be affected by
taking on additional
debt. Likewise, this new loan and repayment schedule will not jeopardize stockholder
dividends or
retained earnings (Exhibit 2). Also, of note is the line of credit TCI established with
MidBank in 1991.
Our management of finances has precluded the need to draw against this line of credit
to date proving
our ability to effectively manage our operations and when we take on new debt.
The proposed asset investment is expected to support anticipated sales growth going
forward.
Our ROA is projected to increase almost 0.2% from our current 14.16% to 14.33%
(1997). Asset
turnover using projected financials will also increase from 2.80 (1995) to 3.17 (1997).
We are thus
confident in our ability to maintain profitability and productivity. With our current ratio
at 2.03 and a
projected current ratio of 1.91(1997), we anticipate adequate liquidity to manage our
debt without
putting the company at undue financial risk.
TCI has a well-considered plan to expand our warehouse, managing inventory while
the
improvements are made and maintaining a competitive advantage in the local tire
retail and service
industry. We are a creditworthy risk demonstrated through our existing relationship
with Midland Bank.
The warehouse expansion will enhance our service to our customers and productivity
among our
workers allowing us to position TCI for greater growth and profitability moving forward.
The forecasted health of Tire City in 1997 as per the pro forma forecast is strong. Top
line Sales
growth is expected to grow at a strong annual growth rate of 20%. Gross Margin which
reflects the
company's markup for resale has been consistent over the years at around 42%.
Operating margin which
indicates the profits after selling the goods and paying for all expenses has been
steady at around 10%
and is expected to continue even after expansion in 1997. TCI manages assets well as
reflected by the
ROA, 1997 forecast demonstrates 14.33%, the highest thus far. The company and the
management have
been mindful of the dividends that are paid out and thus earnings retention ratio is
80% ensuring its
earnings are invested back for future growth. With an increase in warehouse space we
estimate that
there will be an increase in inventory. However, closely looking at the inventory to sales
ratio which
reflects how efficiently inventory is maintained for 1997 they are steady at around
9%.Keeping the ratio
low is a healthy sign. If the ratio is high it could mean sales are falling or the company is
carrying too
much inventory. TCI also has good inventory turnover ratio at 6.75 in 1995. We see this
increase in the
forecasted numbers in 1997 due to the reduced inventory levels of 1996. We expect
this to return to
normal levels of 6.75 in the future.
The analysis above demonstrates Tire City, Inc is in excellent financial health and
stands ready to
grow and profit from a proposed warehouse expansion. We trust this investment will
position Tire City,
Inc to pursue additional opportunities including new store openings and expanded
service and product
lines in the future. We ask MidBank to partner and support TCI during this exciting
phase of business
growth.