Best Buy and RadioShack are two of the most well-known electronics retailers in the
United States. With this title comes a large interest into how their companies are
performing in
this still slowly expanding economy. To compare them, they will put through a series of
comparative ratios such as profitability and liquidity. At the conclusion of this intensive
research,
we will know who is outperforming the other between the two giants of the electronics
world.
To understand the financials of both of these retailer companies, first you must
understand what a retailer is. By definition it is, “purchases, goods or products in large
quantities
from manufacturers directly or through a wholesale, and then sells smaller quantities to the
consumer for a profit.” In layman’s terms, they buy a large sum of inventory and sell it
individually at a higher price for a profit. In this case, how they sell, distribute and profit
from
their sale of inventory will impact substantially the economic health of these two
ubiquitous
retailers.
Liquidity
With the recent economic downfall and its struggle to regain its strength, it is intrinsic
that companies be able to cover their short term obligations. Also they must have the
ability to
sell their inventory as quickly as possible. That is what liquidity ratios deal with. The first
ratio
we will deal with is the current ratio. This shows a company’s ability to pay off all short
term
obligations. You find this by dividing all current assets by all current liabilities which are
both
found on the respective company’s balance sheets.
BestBuy: 1.41
RadioShack: 2.28
This shows that RadioShack is much more equipped to pay off all their obligations than
BestBuy. Any number over 1 shows that you are still able to pay off a short term
obligations.
Inversely, if it is under 1 you are struggling to cover short term debts that you are
incurring.
The next ratio we will take a look at is day’s sale in inventory. This shows on average
how long it would take a company to sell all of the inventory it has. You find this number
by
dividing inventory by cost of goods sold and multiplying that number by 365(days in a
year).
Preferably for this you want to have a low number, it represents the amount of days it takes
to
turn inventory into sales.
BestBuy: 59.8
RadioShack: 129.5
This clearly shows that RadioShack is having an extremely difficult time selling their
inventory. It is taking nearly double the time for them to sell their inventory in comparison
to
other leaders in their industry. This should be raising major red flags to the owners/
