Financial Statement Analysis The RadioShack Corporation Road to bankruptcy?

Course: Fundamentals of FinanceInstructor: David J. MuirDate: May 5, 2011

Team: Arsen AbdyldaevNino Kakachiya

Introduction

RadioShack Corporation  is

an American franchise of electronics

retail stores in the United States, as

well as parts of Europe, South America

and Africa. As of 2008, it had 4,653

company-owned stores, 688 kiosks, 8

service centers, and 1,408 dealer

outlets. RadioShack reported net sales

and operating revenues of $4.81

billion. The headquarters of

RadioShack is located

in Downtown Fort Worth, Texas. .

Leadership of RadioShack

Julian C. DayCEO and Chairman of the BoardRadioShack Corporation

Mr. Day was appointed Chief Executive Officer and Chairman of the Board of RadioShack in July 2006. Prior to his appointment, Mr. Day was a private investor. He will retire effective May 19, 2011.

Year-end 2008

“As it turned out, as we all know only too well, 2008 did prove to be a challenging year for us as well as

the overall economy. Our earnings dropped from $236.8 million last year to $192.4 million for the full

year of 2008, primarily due to a slowdown in consumer spending”

“Approximately half of the $86 million we spent during the year was directed to upgrading our

company-operated stores”

“In addition to our capital expenditures, we acquired 200 stores in Mexico for approximately $45 million

in December.

“We also spent approximately $110 million on share repurchases during the first nine months of the

year”

“We saw our cash balance grow from $510 million to $815 million, placing us in a strong position to

enter 2009 Julian C. Day Chairman and Chief Executive Officer

Current Ratio=1792/637.2=2.81ROA=192.4/2,283.5=0.084=9%(Asset-Light Company)

Debt-equityratio=1466.2/817.3=1.79=180%Creditors have almost twice as much money in the company than equity holders

Long -term debt doubled !!

Total debt =0.64=65% Its not a “blue chip company” Slightly risky to invest

Return on equity=192.4/817.3=0.23=23%

Net Profit Margin =192.4/4224.5=0.045=4.5%Company has a net income of $0.045 for each dollar of sales, which isn’t good factor

Capitalization Ratio=732.5/732.5+817.3=0.47=47% Fairy Healthy company

Operating Cash Flow/Sales Ratio=274.6/4224.5=0.065=6.5%Approximately 0.06 $ of operating cash flow in every sales dollar. 

Issued $375m convertible notes-intrusion of cash

!!!!!!!!!!!Debt Ratings

An obligor is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitments.

The decrease in free cash flow for 2008 was attached to lower earnings, more cash used in working capital, and increased capital expenditures

Altman z-score

NYU Professor Edward Altman introduced the Z-score formula in the late 1960s. Rather than search for a single best ratio, Altman built a model that distills five key performance ratios into a single score. As it turns out, the Z-score gives investors a pretty good snapshot of corporate financial health.

Z = X1 + X2 + X3 + X4 +X4A+ X5

X1 = Working Capital/Total AssetsX2 = Retained Earnings/Total AssetsX3 = Earnings Before Interest & Tax/Total AssetsX4 = Market Value of Equity/Total LiabilitiesX5 = Sales/Total Assets

Now let’s analyze condition of Shack in 2008 using Z-score

Working Capital 1154,8Total Assets 2283,5X1 Factor 0,505714911

Retained Earnings 2153,2Total Assets 2283,5X2 Factor 0,942938472

EBITDA 421,3Total Assets 2283,5X3 Factor 0,184497482

Market Value of Equity 346139,17Total Liabilites $ 1 466 200 000,00 X4 Factor 0,000236079

Sales 4224,5Total Assets 2283,5X5 Factor 1,850010948

Altman Z-Score calculation 3,2989

Strictly speaking, the lower the score, the higher the odds are that a company is headed for bankruptcy. A Z-score of lower than 1.8, in particular, indicates that the company is heading for bankruptcy. Companies with scores above 3 are unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a gray area.

Year-end 2008

“In 2009, we increased net sales and operating revenues to $4.28 billion”

“We delivered net income of $205 million”

“By year-end 2009 we had a cash balance of $908 million”

Julian Day Chairman and Chief Executive Officer

Current ratio = 2015.7/2429.3=0.8297ROA = 205.0/2429.3=0.0844Debt Equity Ratio=1381.0/1048.3=1.3173=131 %Went down 49 %

Long-term debt went down a bit

Total debt =0.56=56%Decreased from previous year,However still not pleasant

Return on Equity=205.0/1048.3=0.1956Net Profit Margin=205.0/4276.0=0.0479

Net income for each dollar of sales rose to 4.8%, however it was still too low

Capitalization Ratio= 0.37=37% Healthy Company

Operating Cash Flow/Sales Ratio= 205/4276=0.047Approximately 0.04 $ of operating cash flow in every sales dollar

Company started repaying debt

Decreased their debt by 31.7 mil

Debt ratings

Working Capital 634,7Total Assets 2429,3X1 Factor 0,261268678

Retained Earnings 2323,9Total Assets 2429,3X2 Factor 0,956613016

EBITDA 426,3Total Assets 2429,3X3 Factor 0,175482649

Market Value of Equity 203083,92

Total Liabilites 1 381 000 000,00

X4 Factor 0,001147056

Sales 4276Total Assets 2283,5X5 Factor 1,872564046

Altman Z-Score calculation 3,26592839

Year-end 2010

“We expanded our mobility business by enriching our product assortment and forging an

important relationship with Target to manage and operate Target Mobile”

“These efforts drove total net sales and operating revenues for 2010 to $4.47 billion”

“Revenues at U.S. company operated stores increased $157 million” A cash balance of $569 million at year-end even after investing $399 million in share

repurchases during the year

Current Ratio= 2.83ROA=206.1/2175.4=0.0947Debt Equity Ratio= 0.38

Long-term debt decreased twice

Total debt ratio=0.61=61% Increased by 5% from previous year

Return on Equity=206.1/842.5=0.2446Net Profit Margin=206.1/4472.7=0.0460

Net Profit Margin remains low – 4.6%

Capitalization Ratio=0.28=28%Went down by 9 % from previous year

Operating Cash Flow/Sales Ratio=0.04=4%Approximately 0.04 $ of operating cash flow in every sales dollar

Company purchased treasury stockWhy? To keep controlling interest ??

Working Capital $ 870,80

Total Assets $ 2 175,40 X1 Factor 0,400294199

Retained Earnings $ 1 502,50

Total Assets $ 2 175,40 X2 Factor 0,690677577

EBITDA $ 459,60

Total Assets $ 2 175,40 X3 Factor 0,21127149

Market Value of Equity $ 149 217,84

Total Liabilites $ 1 332 900 000,00 X4 Factor 0,00011195

Sales $ 4 472,70

Total Assets $ 2 175,40 X5 Factor 2,056035672

Altman Z-Score calculation 3,35839089