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American Apparel Drowning in Debt Case Solution

Solution Id Length Case Author Case Publisher
2799 1776 Words (6 Pages) Anupam Mehta Ivey Publishing : W16208
This solution includes: A Word File A Word File and An Excel File An Excel File

The case talks about the American Apparel company, which had lately been facing issues in terms of the debt that it had acquired and gradually, by taking more and more debt, the company has been facing problems in terms of liquidity and profitability. The industry where it operates is highly competitive, and with changing dynamics in terms of the economy, the stock management and administrative issues have worsened the situation of the company to survive. The company had been investing heavily in terms of its marketing and advertising costs in order to survive and thrive and sustain the existing customer base. However, because of numerous operational inefficiencies and administrative inadequacies, the company is not able to grow and expand as the management had initially thought. The case highlights all these above-mentioned problems with a lot of financial insights in order to better comprehend the areas where the company could improve.

Following questions are answered in this case study solution

  1. Conduct an analysis of the company’s financial statements.

  2. Using a financial ratio analysis, evaluate American Apparel’s financial performance for the past five years.

  3. Analyze the company’s financial statements on the basis of its common size statements. What additional insights do these statements provide?

  4. In your opinion, does American Apparel have an asset management problem? If so, what is the nature of the problem (for example, fixed assets, receivables, inventory, or other)?

  5. On the basis of the financial performance analysis, what actions do you recommend to prevent the company from falling further into debt?

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Case Analysis for American Apparel Drowning in Debt

1. Conduct an analysis of the company’s financial statements.

The American Apparel company has done well overall. Firstly, talking about the total assets from the previous year, 2012, the company was able to increase the total assets amounting to $ 333 Million in 2013. The company also did well in terms of the current liabilities, as there was not seen a substantial increase in this figure, as it only increased by 0.7% in 2013, compared to 2012. The long-term debt figure did change, as the company acquired a long-term loan for capital expenditure purposes. In terms of revenue, the company was able to increase this to $633 Million in 2013. And this was an increase of 3% compared to last year. In terms of cost of sales, this increased more than the company’s increase in sales and had a trickle-down effect on the gross profit of the company, as the gross profit fell by 2% in 2017. In terms of the net profit, the company faced huge losses from the operations, and this had a direct impact on the profitability of the business. As the company had also earned a loss in 2012, and because of poor control over the expenses, the loss of the company further augmented, and the company faced a net loss of $ (106) Million in 2013, and this is an increase of almost 186% compared to the previous year. From the point of view of current assets, the company experienced a decrease in its current assets by 4%, and as a result, liquidity position also worsened by a small margin, also as the current liabilities had also increased in the year 2013, compared to the previous year. The company had been doing well over the last four years, but in the year 2013, its performance got dented and faced lower profitability along with a poor liquidity position. 

2. Using a financial ratio analysis, evaluate American Apparel’s financial performance for the past five years.

By using various financial analyses, for instance, current/quick ratio, debt and debt/equity ratio, inventory turnover, ROA, ROE, etc., better comprehension of the financial results could be obtained. 

In terms of the liquidity ratio, the current ratio saw a falling trend as each year, this ratio had been falling and was at its lowest point at 1.329 in 2013. The same was the case in the quick ratio, as in 2013, it had fallen to 0.283, indicating that the company had tied up a lot of inventory in its assets. Secondly, the debt ratio also saw an increase, although it had fallen a bit in the year 2013 to 0.768. This shows that a lot of assets of the company are financed through external debt acquired. In terms of debt/equity, this had gone into negative in the year 2013, and this means that the company had more interest in its outstanding debt, and the output from the investments is less that the debt acquired.

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