Financial Analysis of Circuit City Stores (ccytq)

Financial Analysis of

Circuit City Stores (CCYTQ)

ACC 511 - FINANCIAL STATEMENT ANALYSIS

Dr. Jeff Grover

March, 2015

This essay is about the financial analysis for Circuit City Stores including analysis of Balance Sheet, Income Statement and Cash Flow statement for the years 2005 to 2008. After the analyses, I will try to explain the reasons for the bankruptcy of the company.

Balance Sheet Analysis of Circuit City Stores

[pic 1]                                                Figure 1: Balance Sheet of Circuit City Stores1

When we look at the balance sheet of the Circuit City Stores we can see current assets decreased from $2,745 million in 2005 to $2,440 million in 2008 while noncurrent assets increased moderately over the three years due to the purchase of PPE. That indicates the company is updating and keeping PPE items current.

Total assets have decreased slightly over the three years due to the $305 million decrease in current assets, which was partially offset by the $210 million increase in noncurrent assets. That indicates a shift toward noncurrent assets since 2005.

Total liabilities increased 27% over the three years while total assets decreased by 2.5%, which indicates a switch to financing assets primarily with liabilities, and, therefore, increasing financial risk.

Stockholders’ equity decreased by 28% due to a reduction in contributed capital and retained earnings, indicating the company is becoming less attractive to shareholders and customers.

To analyze the balance sheet of Circuit City Stores, we should compute financial ratios. Current Ratio of Circuit City Stores in 2005 was 2,08. In 2008, this ratio decreased to 1,58. From 2005 to 2008, a decrease by 11% of total assets and the increase by 22% of current liabilities resulted in a decrease in the current ratio from 2.09 down to 1.52, indicating weaker liquidity.

The Debt Ratio of Circuit City Stores increase from 46% in 2005 to 60% in 2008 indicates greater reliance on liabilities to finance total assets, which brings greater financial risk.

The balance sheet and related ratios indicates a weakening financial position because current assets decreased while current liabilities increased which results weaker liquidity.

The debt ratio rose from 46% up to 60%, results significantly higher financial risk.

Contributed capital decreased, indicating the company is less attractive to shareholders and Retained earnings decreased which indicates lower profitability.