Circuit City: Financial Strengths and Recommendation.
Circuit City, the third largest consumer electronics retailer in the United States is actually experiencing financial problems as evidenced by its computed financial ratios presented by Reuters.
Circuit City posted a net profit margin of -1.22% when the industry reported 2.89% while the sector averaged 9.56% (Circuit City 2007).
However, amidst the failure of the retailer to operate profitability it should be commended for its financial strengths in terms of liquidity and leverage. It should be noted that during the fiscal year 2006, Circuit City reported a quick ratio of 0.55 and a current ratio of 1.53. The company is more liquid than the industry which posts a quick ratio of 0.41 and current ratio of 1.27(Circuit City 2007). These higher liquidity ratios indicate that the company's current assets in proportion with short term liabilities can more likely cover its current obligations if they become due immediately. The fact that Circuit City is outperforming the industry is an indication of financial strength.
Circuit City has a relatively less risky capital structure compared to the industry and the retailing sector. The company's long term debt to equity ratio is 0.03 far less than the industry average of 0.26. Furthermore, its long term debt to equity ratio is 0.04 which is also less than the 0.53 in the industry (Circuit City 2007). These low ratios indicate the lower risk faced by the company since its resources are mostly financed by equity and not by debt. ...