Tire City Inc.

Current Financial Health Profitability Tire City has shown strong sales growth from 1993-1995. Sales increased 25.42% in 1994, and15.48% in 1995 respectively. They have improved their profit margin in every year, 1993 had a profit margin of 4.81%, 1994 4.90%, while 1995 has improved to 5.06%. Contributing to this improving margin was a decrease in Cost of Goods Sold as a % of sales, and interest expense as a % of sales. Tire Citys gross profit margin has improved slightly through the years, 1994 saw41.55% while 1995 saw 42.05% suggesting that Tire City may be charging slightly higher prices or have found cheaper suppliers of tires. Interest expense as a % of sales has decreased due to how they are paying off their original warehouse loan in $125,000 increments. Asset Turnover Assisting the improving profit margin Tire City has seen an improved asset turnover ratio. It has increased every year from 2.47x in 1993, 2.60x in 1994, and 2.62x in 1995. The main improvement for this increase is fixed asset turnover, which improved in 1995 to 9.65x, from8.93x in 1994. The increase is a result of decreasing planet & equipment as a % of sales. One can conclude that the company purchased a little more plant & equipment; however sales increased significantly thereby increasing fixed asset turnover. A slightly offsetting factor was A/R turnover, it has decreased slightly from 6.58x in 1994, to 6.44x times in 1995. This is due to a longer collection time, which has rose from 55.5 days in 1994, to 56.7 days in 1995. Tire Citys inventory turnover has also slightly declined, from 6.47 in 1994, to 6.22 in 1995. This is due to a higher inventory period, in 1994 inventory was sold off in 56.4 days, in 1995 this has slightly increased to 58.7

days. This is a result of a higher inventory as a % of sales in 1995 compared to1994, in 94 inventories were 9.03% of sales, in 95 they were 9.32%. Financial Leverage Tire City has moved to reduce its financial leverage, its assets to equity ratio has decreased every year from 2.01 in 1993, 1.92 in 1994, and 1.79 in 1995. This signals that they are reducing their risk levels and improving their solvency. Tire City has strong operating cash flows to fund its day to day operations and pay down its warehouse loan. They have yet to borrow from the line of credit established with Mid bank. Its times interested earned has improved significantly from18.16x in 1994, to 23.50 in 1995. This has been a result of higher net income and decreased interest expense. Tire Citys cash conversion cycle has increased from 71.2 days in 1994 to 76.8days in 1995. This is due to a higher collection period and shortened payable period compared to1994. Liquidity Tire City has improving current and quick ratios from 1994, in 1995 the current ratio was 2.03(from 1.92) and a quick ratio of 1.35 (from 1.29). They are having no problem generating cash from operations , in 1994 operating cash flows were $989,000, and $830,000 in 1995. This reduction in cash flows was due to an increase in spending on inventory to support its sales growth. Future Financial Health Profitability

After predicting future sales growth of 20% in subsequent years of 1996 and 1997. My proforma income and balance sheet predicts that the profit margin will rise in 1996 to 5.16%, and then fallback to 4.98% in 1997. Contributing to the rise in 1996 is a falling depreciation expense as a percentage of sales and a slightly lower interest expense as a percentage of sales. Contributing to the fall of the profit margin in 1997 is an increased depreciation expense as a percentage of sales, since Tire City is allowed to write off 5% of the planned warehouse expansion that year. Another reason is that interest expense as a percentage of sales has increased due to larger amount of debt that has been taken on to fund the expansion of the warehouse. Asset Turnover Tire City will see a declining asset turnover ratio in 1996 and 1997. They managed a ratio of 2.62x in 1995, which later falls to 2.55x in 1996, and then 2.47 in 1997. Dragging down the ratiois a slower fixed asset turnover which has resulted in the companys big investment in fixed assetin 96 being the warehouse. In 1995 fixed assets were 27.11% of total assets (10.36% of sales),in 1996 they were 34.64% of assets (14.97% of sales). Offsetting this slower fixed asset turnover is an improved inventory ratio, inventory is now being turned over 10.05 times a year compared to 6.22 times in 1995. This has been due to the company raising $565,000 in 1996 by selling off a significant amount of their inventory which has resulted in a more efficient turnover. In 1997inventories come back to their previous levels in proportion to sales, which in turn takes the inventory turnover

back to 6.22x a year, this contributes to the declining asset turnover in 1997.However in 1997 fixed asset turnover picks up again as a smaller investment in fixed assets is made and sales increase 20%, as opposed to a huge increased in fixed asset in 1996.

Financial Leverage Tire City will see a fairly moderate increase in financial leverage through 1996 and 1997. Asset to equity in 1995 was 1.79, the same ratio found in 1996, and in 1997 the ratio is 1.82, a slight increase. Tire City makes a substantial operating cash flow of $2,122,000, which can be attributed to them selling off a majority of their inventory. In 1997 operating cash flows make a cliff dive down to $354,000, this can be traced to re-buying a large amount of inventories to make them proportioned to sales like they were in 1995. Times interest earned makes a rise in1996 to 24.34x then falls back to 19.50x in 1997. The rising sales and lack of an increasing depreciation expense in 1996 attributed to the gain as well as a lower interest expense as a percentage of sales, while in 1997 depreciation expense increased and interest expense as a percentage of sales increased to .48% from .38% in 1996 Liquidity

Tire Citys current ratio decreased in 1996 to 1.79x from 2.03x in 1995, this ratio however improves in 1997 to 2.06. Quick ratios remain around the same levels in

1995. The current ratio is reduced in 1996 due to the selling off inventories to fund operations in 1996, when the levels go back to normal in 1997, this is what improves the current ratio Tire Citys current ratio decreased in 1996 to 1.79x from 2.03x in 1995, this ratio however improves in 1997 to 2.06. Quick ratios remain around the same levels in 1995. The current ratio is reduced in 1996 due to the selling off inventories to fund operations in 1996, when the levels go back to normal in 1997, this is what improves the current ratio.

Overall Id have to say that Tire City will be in a weaker financial position in 1997 compared to 1995.Looking at it from a DuPont decomposition standpoint, you can see how ROE has decreased, the profit margin has fallen, a slower asset turnover, and increased financial leverage. As a lender I would be willing to loan Tire City the funds needed to expand their warehouse, they are showing positive operating cash flows on my pro-forma, and remain profitable. The times interest earned ratio remains high and provides some safety in knowing they can cover their interest costs 19.50 times over in 1997.