Tire City Inc

2135 WordsMar 11, 20139 Pages
Tire City Incorporated Tire City, Inc. is a rapidly growing retail distributor of automotive tires. Although they have 10 shops located throughout the Northeast region, the bulk of TCI’s inventory is managed at a central warehouse. During the last three years, sales have been growing at a compound annual rate in excess of 20%. With such a great reflection of their excellent service and customer satisfaction in their net income, TCI’s central warehouse is “bulging at the seams”. TCI has decided to expand its warehouse facilities to accommodate future growth, and has requested a five year loan. We, MidBank, previously financed a project for TCI in 1991, which is currently being repaid in equal annual installments. TCI plans to…show more content…
Profitability Ratios: The Gross Margin ratio represents the percent of total sales revenue that TCI retains after incurring the direct costs associated with producing the goods and services sold by them. It helps us distinguish, as much as possible, between fixed and variable costs. With a 20%, 15%, or 10% projected increase in sales, for 1996, we calculated TCI’s GM ratio to be 41.85% , and in 1997 to be 41.84%. This means that around 42% of TCI’s sales dollar is available to pay for fixed costs, like its potential long-term debt to MidBank, and to add to profits. The Return on Assets ratio is a basic measure of the efficiency with which TCI allocates and manages its resources (assets) to generate earnings. With a 20% projected increase in sales, for 1996, we calculated TCI’s ROA to be 12.95%, and 12.11% for 1997. Although this isn’t an extremely high ROA, TCI will be allocating its resources very wisely with the expansion of its central warehouse. If MidBank lends them the cash they need to complete this project, their central warehouse will be able to hold more tires for their increasing sales, which will then convert into profit. A true test of TCI’s ROA will be after 1998, when the warehouse is complete, so you can see just how well they can convert an investment into profit. The Return on Equity ratio is a measure of the efficiency with which a company employs owners’ capital. It

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