Tire City, Inc. Case Discussion

In: Business and Management

Submitted By scottdolan75
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1). The current financial health of Tire City, Inc. can be determined by looking at its financial statements, and converting the information on them into a number of different ratios, which give analysts information about the financial activities/health of the firm. These ratios include (but are not limited to) the current ratio, acid test, profit margin, total asset turnover, and return on equity. The current ratio measures short term solvency, or the firm’s ability to pay off its short term debt. TCI’s current ratio is 2.03, a healthy indication. This means that for every dollar of short term debt the firm carries, it holds $2.03 in current assets. This means that the company is not facing any significant threat from its short term lenders. The acid test is basically a refined version of the current ratio, deducting inventories from the current assets of the firm, because of their illiquidity. The acid test for TCI in 1995 is 1.35. This is notably lower than the current ratio, which may indicate that TCI is holding too much inventory, but 1.35 is still a generally healthy acid test ratio. The profit margin and total asset turnover of TCI are 5.06% and 2.61, respectively. These numbers are used in the DuPont Equation to calculate Return on Equity, generally a good measure of a firm’s financial health. The ROE for TCI is 23.73%, which by most investors’ standards is a very strong return. The forecasted ROE for 1996 for TCI is 32.67%, an even stronger return. The overall health of TCI at the end of 1995 looks pretty good, they hold the correct amount of assets to debt ratios, they don’t hold too much inventory, and there is a strong return on their equity, which is forecasted to get stronger.

2) See attached spreadsheets

3). As of the end of 1997 Tire City Inc. will be in healthy financial shape pending approval of loans to cover the additional funds needed…...

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