Best Buy Co., Inc. (BBY) Is Not a Sinking Ship

Argument #3: Discontinuing operations is a sign of impending bankruptcy

Best Buy has been closing some domestic stores, and the author claims that this is a sign that the company is in trouble. But keeping unprofitable stores open would be far worse, wouldn’t it? Huge big-box stores make less sense today than they did in the past, and downsizing is the best option. Best Buy Co., Inc. (NYSE:BBY) is opening new, smaller mobile stores even as it closes some larger stores, so it’s clear that the author’s argument doesn’t hold much weight.

Argument #4: Debt is growing and Best Buy is using debt to fund the dividend

The article shows the debt/equity ratio growing over the past five years, and makes the claim that debt is increasing and that the company is using that debt to fund the dividend in an apparent attempt to fool investors. As I’ve already said, Best Buy’s free cash flow more than fully funds the dividend, so the second part of the argument isn’t valid.

At the end of 2007 Best Buy Co., Inc. (NYSE:BBY) had a total interest-bearing debt of $816 million. At the end of Q1 this year that debt has grown to about $1.69 billion. So debt has increased, but not by an enormous amount like the article claims. The debt has actually decreased from its levels at the end of 2008, when total debt was $1.96 billion. So the article argues that a massive increase in debt took place even though debt levels have decreased over the past four years.

The bottom line

Simple ratios and metrics don’t tell the whole story. The quick and current ratios are important but they are almost meaningless on their own. Best Buy Co., Inc. (NYSE:BBY) is clearly not having liquidity problems, it’s not at risk of bankruptcy, and it isn’t funding the dividend with debt. You can believe whatever you want about the company’s long term prospects, but the facts don’t lie.

Timothy Green owns shares of Best Buy. The Motley Fool recommends McDonald’s Corporation (NYSE:MCD). The Motley Fool owns shares of McDonald’s.

The article Best Buy Is Not a Sinking Ship originally appeared on Fool.com.

Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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