Analysis of Circuit City Bankruptcy Essay

1108 Words Mar 29th, 2012 5 Pages
INTRODUCTION
Circuit City Stores, Inc. was an American retailer in brand-name consumer electronics, personal computers, entertainment software, and (until 2000) large appliances. The company opened its first store in 1949 and pioneered the electronics superstore format in the 1970s. By the end of 2008, Circuit City was the second largest U.S. electronics retailer, behind Best Buy. There were 567 Circuit City Superstores nationwide, ranging in size from 15,000 to 45,000 square feet.

On November 4, 2008, Circuit City announced that it would close 155 stores and lay off 17% of its workforce by the end of the year as a result of continuing difficulties in remaining profitable. On November 7, 2008, Circuit City laid off between 500 and
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Complacency was a fatal mistake in the fiercely competitive and fast evolving retail electronic industry.
PREDICTING THE BANKRUPTCY
The big question posed to financial analysts is: Could the bankruptcy of Circuit City Stores, Inc. be predicted in advance? As a financial analyst, this is the question I would like to find an answer to in this paper.

THE TEXT-BOOK WAY
Let us use the traditional way, i.e. the financial ratios route to see if we can foresee the Circuit City bankruptcy in advance. I would use the following ratios to see the trend and change over the last 5 years (FYE Feb 2004 – FYE Feb 2008 – See Appendix for 5 year Balance Sheet and Income Statement):
• Liquidity Ratios
• Asset Management Ratios
• Debt Management Ratios
• Profitability Ratios
• DuPont Analysis
• Market Ratios
• Some Other Ratios

An interpretation of the results is as follows (summarized results in the appendix):
• Liquidity ratios have been deteriorating over the last few years. Although they do not pose any imminent danger to Circuit City, but it should be given some consideration and investigated, as these figures are way below their major rival Best Buy.
• Circuit City’s debt level is increasing at a rate of approximately 5% per annum (compared to equity), which makes it riskier every year, and this also a sign that the company will not be able to secure long-term, lower interest financing, instead having to

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