Sears Holdings Corporation Case Solution

Cash Flow Analysis

Cash flow analysis is performed over the last three years. The financial health of the company is very poor. The company is generating negative cash from its operations. The total revenue of the company has decreased by 14% in the year 2014 as compared to the year 2013, which could be due the financial crisis or economic down turn. Moreover, the total expenses have increased, which results in negative cash flow from operations.
In addition to this, cash flow from investing activities has also decreased significantly as compared to the previous years, which shows that the company is not performing well with respect to its investing activities. In the year 2014, the company made purchases of property plan and equipment of worth $270 million, which also resulted in decreased cash flow from investing activities. In addition to this, the company is paying $80 million with respect to the repayment of long term borrowing, which also result

Sears Holdings Corporation case solution

Sears Holdings Corporation case solution

s in decrease in cash flow from financing activities.

Free Cash Flows Analysis

The cash flow from operations includes non-cash items such as depreciation, therefore in order to identify the real cash worth of the company; the free cash flows are calculated. In order to identify free cash flows, the depreciation is added back in to the profit from operations and capital expenditure is deducted.
The operating profit of the company include large amount of depreciation however, after adding back depreciation in to the profit from operations and by deducting capital expenditure form the profit, it is clear that each division of the company is generating negative free cash flows except Sears Canada, which is generating positive free cash flows worth $386 million.
The overall cash flow summary of cash flow statement of the company shows that the company is facing the problem of increased debt and decrease in revenues, which results in decrease in cash flow from operating, investing and financing activities. Therefore, the company is facing high risk in this case. Sears is considering selling200 or 300 stores, therefore it is expected that it will help the company in order to deal with this financial distress, which the company is facing due to negative free cash flows and increase in gearing ratio.
The strongest part of the company is its past records and having large number of stores, which could be turn around in order to support the company. Moreover, as a result of the decomposition of the stores, its share price increased by 34% and currently, its share is being traded at $43.71.

Debt Analysis

It is expected that the company is highly leveraged and the gearing ratio of the company is increasing continuously, which shows that the company is heavily relying on debt in order to support its business activities.Furthermore, the management of the company is considering raising $400 million through hedged funds and $625 million through unsecured warrants, which increases the total liabilities by 6.5%.
The company is generating $102.5 million through the sale of its stores and it is expected that the company will use these funds in order to reduce its gearing ratio; therefore $102.5 million have been deducted from total liabilities.
By looking at the maturity table, it is clear that the company also owes capital lease obligations of worth 272 at the end of year 2014. It is expected that the maturity period of this capital lease obligation is 5 years, therefore interest payment have been calculated by deducting the annual lease payment from the total interest bearing borrowing. In order to calculate interest payments over the interest bearing lease obligations, the weighted average growth rate is used………………

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