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Liquidity Ratios

Current Ratio - Blockbuster's current ratio has been increasing for the past five years, with the past two years reporting a value of 1.08. Reaching a value above 1 in 2004 was critically important in proving their ability to cover current liabilities with current assets. The current ratio was able to hold at 1.08 in 2005 largely due to a $358 decrease in accounts payable. The company has expressed a commitment to improving profitability and cash flows in response to the poor lending terms they are facing, and paying down A/P was a step in that direction.6 Blockbuster is underperforming in this category according to industry standards (1.7%).2

Quick Ratio - Blockbuster's quick ratio has shown an increasing trend during the past four years. The most significant hike occurred in 2005 and was a result of improved inventory management. The firm chose to spend less on merchandise inventory in 2005 to free up cash flow and improve their financial positioning. They expressed an intent to reduce inventories yet again in 2006, which will likely continue the rising trend in their quick ratio.6 The improvements seen in this ratio are promising, as it shows that if the firm cannot sell inventory, their remaining current assets can still cover 84% of their current liabilities.

Conclusion - Blockbuster's liquidity is sufficient to cover current obligations, but could still use further improvement. They do appear to be on the right track, however, in finding the appropriate, balanced growth rate between current assets and liabilities. Due to their stated need to improve their perceived liquidity6, it seems reasonable to predict that the increasing trends will continue.

Asset Management Ratios

A/R Turnover - An increasing trend is evident for A/R turnover over the past four years indicating that Blockbuster is improving their ability to collect receivables. This trend can be partly attributed to falling A/R since 2002, with the most drastic change taking place in 2005. Rising revenues from 2002-2004 also played a role, while the drop in 2005 was offset by the aforementioned drop in A/R. Receivables turnover is low by industry standards, 2 but the company admits that receivables consist of very little concentrated risk for the firm.6

Inventory Turnover - Inventory turnover took a significant drop from 2001 to 2002 then remained low until 2005. In 2005, inventory turnover jumped to 8.53X. This means Blockbuster completely drained their inventory about 8.5 times in 2005. The recent rise was caused by an increase in COGS, which can be attributed to an increase in merchandise sales (low margin) and a decrease in rental gross margins (explained further in gross margin ratio). A fall in inventory (attributed to improved inventory management) is also responsible for the recent rise in this ratio. Blockbuster has remained competitive by industry standards at effectively managing its inventory, and this is something they desire to continue to improve.2

Operating Cycle - As expressed above, Blockbuster had a bit of lull in inventory processing in 2002-2004, but made improvements in 2005. In 2005 it took them about 51 days to collect cash from the day they first bought the inventory to when they sold it.

Fixed Asset Turnover - Except for a slight blip in 2004, Blockbuster has been continually increasing the amount of revenue they derive from their fixed assets. Property and equipment have been declining fairly consistently since 2001, and revenues increased until 2005. The rise in 2005's fixed asset turnover is attributed to a fall in property and equipment. Continual improvement in this category is dependent

on pushing revenue back up.

Total Asset Turnover - Blockbuster has consistently improved its performance for the past five years in using its assets to create more revenue. Their most recent recording of 1.84 makes them competitive by industry standards, but this did not come about until recently. Interestingly, perhaps the biggest driver of the improved performance was the decrease in goodwill each year. This impairment can be expected to continue into the future, though at a decreasing rate according to recent trends. The impairment was described as resulting from increased competition among retailers, piracy abroad, and other leisure entertainment venues.6 Unless Blockbuster is able to bolster their revenues, it is not likely that this ratio trend will continue.

Conclusion - Many of Blockbuster's management ratios are deceptive. While they do hold some promise, it is evident that generating more sales is a critical concern guiding their metrics. New strategic initiatives give hope that they will move forward.

Profitability Ratios

Gross Profit Margin - Gross margins for Blockbuster experienced an increasing trend from 2001-2004 due to rising revenue, then dropped about 5% to 54.86% in 2005 as revenue fell with a simultaneous increase in COGS. The decreasing gross margin in 2005 was a result of declining rental margins stemming from the results of new strategic initiatives. Blockbuster Movie Pass and Blockbuster Online led the company to purchase more products to meet demand for in-store offerings and grow their Online business. Unfortunately, revenues fell disproportionately higher than product purchases, perhaps due to "a weak slate of titles" being released. Shipping costs are also included in the cost of rental revenues.6 Despite this drop, Blockbuster is still creating better gross margins than its competitors according to industry averages.2 While 2005 may have been an anomaly, the possibility does exist that they become dependent

upon acquiring enough subscribers to offset the "small" decline in gross margins.

Operating Profit Margin - Operating profit margin shows no real trend, but is significant because it has remained negative for four of the past five years. It seems that while Blockbuster is able to pull off a good price/cost ratio, they are doing a poor job of managing operations costs. In fact, the greatest contributor to "excessive" operating expenses is impairment of goodwill and other long-lived assets from 2003-2005. The practicality of this measure and its level of significance for concern do seem limited. G&A expenses did improve in 2005, partially due to strategic initiatives to control operating costs. 6 Still, Blockbuster is performing significantly below the industry average in this category.2

Net Profit Margin - Blockbuster's net profit margins have fallen pretty much in line with their operating profit margins, indicating that their interest