Forecasting Pro Forma Financial

statements
Tire City Inc.
Gintė Mockienė, VUEF, Finance

2017 October 3rd

 Company background

• Tire City Inc. was rapidly growing distributor of

automotive tires
• Operating in northeastern United States
• Having 10 shop
• The main amount of TCI‘s inventory was
central warehouse
• Stores was easily serviced by this warehouse
within 24 hours
2017 October 3rd VU Ekonomikos fakultetas
 Company background

Reputation for excellent service and competitive

pricing yielded high level of customer satisfaction
and sales growth.

Year 1993 1994 1995 Expected in 1996 Expected in 1997

Net sales $ 16,230 $ 20,355 $ 23,505 $ 28,206 $ 33,847
Growth N/A 25% 15% 20% 20%

*Numbers are given in thousand of dollars

2017 October 3rd VU Ekonomikos fakultetas

 Company background

• In 1991, TCI took a loan from MidBank to

build a warehouse
• Loan was being repaid in equal annual payments
of $125 000
• At the end of 1995, the balance due on the loan
was $875 000
Year 1991 1992 1993 1995 1996
Balance due of the loan $ 1,250,000.00 $ 1,125,000.00 $ 1,000,000.00 $ 875,000.00 $ 750,000.00
1997 1998 1999 2000 2001 2002
$ 625,000.00 $ 500,000.00 $ 375,000.00 $ 250,000.00 $ 125,000.00 0

2017 October 3rd VU Ekonomikos fakultetas

 Task

• Chief Financial Officer of Tire City, Inc. Jack

Martin should prepare for a meeting with
company‘s bank
• Mr. Martin should present proforma financial
statements for a bank for 1996 and 1997
• Mr. Martin intended to present a request of five-
year loan for expansion of the comany‘s
warehouse facilities

2017 October 3rd VU Ekonomikos fakultetas

 Task

• During next 18 months TCI planed to invest $2

400 000 to its expansion
• $2 000 000 will be spent during 1996
• $400 000 will be spent during 1997
• This investment will fulfill the company’s
anticipated needs for several years
• The loan will be repaid in four equal annual
installment starting from 1998.
2017 October 3rd VU Ekonomikos fakultetas
 Questions

• What can we say about Tire City, Inc.

financial health?
• Should company invest in expansion of
warehouse?
• Can company expect to get a loan for expansion
of warehouse?

2017 October 3rd VU Ekonomikos fakultetas

 Financial statements –
Income statement
INCOME STATEMENT 1993 1994 1995
Net sales $ 16,230 $ 20,355 $ 23,505
Cost of sales $ 9,430 $ 11,898 $ 13,612
Gross profit $ 6,800 $ 8,457 $ 9,893
Selling, general and administrative expenses 5195 6352 7471
Depreciation 160 180 213
Net interest expense 119 106 94
Pre-tax income $ 1,326 $ 1,819 $ 2,115
Income taxes 546 822 925
Net income $ 780 $ 997 $ 1,190
Dividends $ 155 $ 200 $ 240
Addition to retained earnings $ 625 $ 797 $ 950
*Numbers are given in thousand of dollars
2017 October 3rd VU Ekonomikos fakultetas
 Financial statements –
Balance sheet
ASSETS 1993 1994 1995
Cash $ 508 $ 609 $ 706
Accounts receivable 2545 3095 3652
Inventories 1630 1838 2190
Total current assets $ 4,683 $ 5,542 $ 6,548

Gross plant & equipment 3232 3795 4163

Accumulated depreciation 1335 1515 1728
Net plant & equipment 1897 2280 2435

Total assets $ 6,580 $ 7,822 $ 8,983

*Numbers are given in thousand of dollars

2017 October 3rd VU Ekonomikos fakultetas

 Financial statements –
Balance sheet
LIABILITIES 1993 1994 1995
Current maturities of long-term debt $ 125 $ 125 $ 125
Accounts payable 1042 1325 1440
Accured expenses 1145 1432 1653
Total currebt liabilities 2312 2882 3218

Long-term debt 1000 875 750

Common stock 1135 1135 1135

Retained earnings 2133 2930 3880
Total shareholders' equity 3268 4065 5015

Total liabilities $ 6,580 $ 7,822 $ 8,983

*Numbers are given in thousand of dollars
2017 October 3rd VU Ekonomikos fakultetas
 Ratio analysis

PROFITABILITY 1993 1994 1995

Profit margin 4.81% 4.90% 5.06%
Return on assets 11.85% 12.75% 13.25%
Return on equity 23.87% 24.53% 23.73%

FINANCIAL LEVERAGE 1993 1994 1995

Total debt ratio 0.503 0.480 0.442
Long-term debt ratio 0.234 0.177 0.130
Interest coverage 10.143 16.160 21.500
Cash coverage 11.487 17.858 23.766
Debt-equity ratio 1.013 0.924 0.791

2017 October 3rd VU Ekonomikos fakultetas

 Ratio analysis
TURNOVER 1993 1994 1995
Inventory turnover 3.187 3.456 3.411
Days' sales in inventory 114.5236 105.616 106.994
Receivable turnover 6.37721 6.57674 6.4362
Days' in receivables 57.23506 55.4986 56.7105
Fixed asset turnover 8.556 8.928 9.653
Total asset turnover 2.467 2.602 2.617

LIQUIDITY 1993 1994 1995

Current ratio 2.026 1.923 2.035
Quick ratio 1.321 1.285 1.354

2017 October 3rd VU Ekonomikos fakultetas

 Financial health –
1993-1995
• Sales increased by 44.82%. From $16 230 000 in
1993 to $23 505 000 in 1995
• Net income increased by 52.56%. From $780
000 in 1993 to $1 190 000 in 1995
• Profit margin increased by 0.25%. From 4.81%
in 1993 to 5.06% in 1995
• Current and quick ratios are over 1 – means that
company is healthy (current liabilities are well
covered by current assets)
2017 October 3rd VU Ekonomikos fakultetas
 Financial health –
1993-1995
• Total asset turnover – 2.617. Health company’s
performance because TCI makes 2.617$ for
each 1$ in its total assets
• Day’s in inventory – 106.994 days.
• All ratios are consistent

2017 October 3rd VU Ekonomikos fakultetas

 Financial health –
1993-1995

Conclusion - TCI in 1993-1995 period was

financially healthy

2017 October 3rd VU Ekonomikos fakultetas

 Questions

• What can we say about Tire City, Inc. financial

health?
• Should company invest in expansion of
warehouse?
• Can company expect to get a loan for expansion
of warehouse?

2017 October 3rd VU Ekonomikos fakultetas

 Ratio analysis

Growth 1993 1994 1995

Internal growth rate 10.48% 11.35% 11.85%
Sustainable growth rate 23.60% 24.41% 23.43%
Year 1993 1994 1995 Expected in 1996 Expected in 1997
Net sales $ 16,230 $ 20,355 $ 23,505 $ 28,206 $ 33,847
Growth N/A 25% 15% 20% 20%

Expected growth rate is higher then internal growth rate.

It means that TCI has external financial need. They will be
able to accept expected growth rate without increasing its
financial leverage
2017 October 3rd VU Ekonomikos fakultetas
 Questions

• What can we say about Tire City, Inc. financial

health?
• Should company invest in expansion of
warehouse?
• Can company expect to get a loan for
expansion of warehouse?

2017 October 3rd VU Ekonomikos fakultetas

 Proforma financial
statements 1996-1997
INCOME STATEMENT 1993 1994 1995 ASUMPTIONS 1996 1997
Net sales $ 16,230 $ 20,355 $ 23,505 20% increase in sales each year $ 28,206 $ 33,847
Cost of sales 9430 11898 13612 Avargae 58.2% of sales 16416 19699
Gross profit 6800 8457 9893 11790 14148

Selling, general and administrative expenses 5195 6352 7471 Avarage 31.7% of sales 8941 10730
Depreciation 160 180 213 Assumption given in a case 213 333
Net interest expense 119 106 94 12% of remaining log-term debt 75 60
Pre-tax income 1326 1819 2115 2561 3026

Income taxes 546 822 925 Avarage 43.4% of the pre tax 1111 1313
Net income $ 780 $ 997 $ 1,190 $ 1,449 $ 1,712
Dividends 155 200 240 Avarage 20% dividends payout ratio 290 342
Addition to retained earnings 625 797 950 Avarage 80% plowback 1160 1370

*Numbers are given in thousand of dollars

2017 October 3rd VU Ekonomikos fakultetas
 Proforma financial
statements 1996-1997
BALANCE SHEET
ASSETS 1993 1994 1995 ASUMPTIONS 1996 1997
Cash $ 508 $ 609 $ 706 Avarage 3% of sales $ 846 $ 1,015
Accounts receivable 2545 3095 3652 Avarage 15.5% of sales 4372 5246
Inventories 1630 1838 2190 Assumption given in a case for 1996 and avarage
1625 9.5%3215
of th
Total current assets 4683 5542 6548 6843 9477

1995+2 millions for 1996 and +400

Gross plant & equipment 3232 3795 4163 thousands for 1997 6163 6563
1996 increase of 213, 1997 increase
Accumulated depreciation 1335 1515 1728 of 213 +5% of 2400000 1941 2274
Net plant & equipment 1897 2280 2435 4222 4289

Total assets $ 6,580 $ 7,822 $ 8,983 $ 11,065 $ 13,766

*Numbers are given in thousand of dollars

2017 October 3rd VU Ekonomikos fakultetas
 Proforma financial
statements 1996-1997
LIABILITIES 1993 1994 1995 ASUMPTIONS 1996 1997
Current maturities of long-term debt $ 125 $ 125 $ 125 asumption given in a case $ 125 $ 125
Accounts payable 1042 1325 1440 Avarage 6.4% of sales 1805 2166
Accured expenses 1145 1432 1653 Avarage 7% of sales 1974 2369
Total currebt liabilities 2312 2882 3218 3905 4661

Long-term debt 1000 875 750 Asumption given in a case 625 500
Bank debt Balancing figure 361 1061

Common stock 1135 1135 1135 remain unchanged 1135 1135

Retained earnings 2133 2930 3880 5040 6410
Total shareholders' equity 3268 4065 5015 6175 7545

Total liabilities $ 6,580 $ 7,822 $ 8,983 $ 11,065 $ 13,766

*Numbers are given in thousand of dollars

2017 October 3rd VU Ekonomikos fakultetas
 Ratio analysis
1996-1997
PROFITABILITY 1993 1994 1995 1996 1997
Profit margin 4.81% 4.90% 5.06% 5.14% 5.06%
Return on assets 11.85% 12.75% 13.25% 13.10% 12.44%
Return on equity 23.87% 24.53% 23.73% 23.47% 22.70%

FINANCIAL LEVERAGE 1993 1994 1995 1996 1997

Total debt ratio 0.503 0.480 0.442 0.442 0.452
Long-term debt ratio 0.234 0.177 0.130 0.092 0.062
Interest coverage 10.143 16.160 21.500 33.144 49.426
Cash coverage 11.487 17.858 23.766 35.984 54.976
Debt-equity ratio 1.013 0.924 0.791 0.792 0.825

2017 October 3rd VU Ekonomikos fakultetas

 Ratio analysis
1996-1997
TURNOVER 1993 1994 1995 1996 1997
Inventory turnover 3.187 3.456 3.411 10.102 6.126
Days' sales in inventory 114.524 105.616 106.994 36.131 59.579
Receivable turnover 6.377 6.577 6.436 6.452 6.452
Days' in receivables 57.235 55.499 56.710 56.575 56.575
Fixed asset turnover 8.556 8.928 9.653 6.681 7.892
Total asset turnover 2.467 2.602 2.617 2.549 2.459

LIQUIDITY 1993 1994 1995 1996 1997

Current ratio 2.026 1.923 2.035 1.753 2.034
Quick ratio 1.321 1.285 1.354 1.336 1.344

2017 October 3rd VU Ekonomikos fakultetas

 Conclusions

• Tire City, Inc. is strong financially

• Consistent proforma ratios
• Sales will not decrease during expansion of
warehouse when inventory was noticeable lower
in 1996
• Ratios in financial leverage will decrease in 1998
when company will start to pay loan. However
sales should increase even more because of
opportunities of newly expanded warehouse.
2017 October 3rd VU Ekonomikos fakultetas
 Answers

• What can we say about Tire City, Inc. financial

health?
Company is and according proforma statements should be financial
healthy in 1993-1997
• Should company invest in expansion of
warehouse?
Yes
• Will bank give a loan for expansion of warehouse?
Yes, company will be able to pay loan in 4 years
2017 October 3rd VU Ekonomikos fakultetas