Question

EXHIBIT 1: SHARE PRICES OF AMERICAN APPAREL, 2008 TO 2014 Share Prices Share Prices Share Prices 1/7/2008 1/7/2009 1/7/2010 1/7/2011 1/7/2012 1/7/2013 1/7/2014 Source: Yahoo! Finance, "American Apparel Inc. (APP)," Yahoo! Finance, accessed December 23, 2014, http://finance.yahoo.com/q/hp?s=APP&a=00&b=7&c=2008&d=11&e=8&t=2014&g=m&z=66&y=66. EXHIBIT 2: AMERICAN APPAREL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS, 2009-2014 (Amounts and shares in thousands, except per share amounts) $ $ Years Ended December 31, 2013 2012 $ 633,941 $ 617,310 $ 313,056 289,927 320,885 327,383 241,683 227,447 106,957 97,327 1,540 1,647 (29,295) 962 39,286 41,559 120 2011 547,336 252,436 294,900 209,841 104,085 4,267 (23,293) 33, 167 1,679 2010 532,989 253,080 279,909 218,198 103, 167 8,597 (50,053) 23,752 (686) 2009 558,775 238,863 319,912 198,518 93,636 3,343 24,415 22,627 (2,920) 993 Net sales Cost of sales Gross profit Selling expenses General and administrative expenses Retail store impairment (Loss) income from operations Interest expense Foreign currency transaction loss Unrealized loss (gain) on change in fair value of warrants and purchase rights Loss (gain) on extinguishment of debt Other expense (income) Loss before income taxes Income tax provision Net loss Basic and diluted loss per share Weighted average basic and diluted shares outstanding Net loss (from above) Other comprehensive (loss) income item: Foreign currency translation, net of tax Other comprehensive (loss) income, net of tax Comprehensive loss 3,713 32, 101 131 (104,527) 1,771 $ (106,298) $ $ (0.96) $ 4, 126 (11,588) 204 (33,459) 3,813 (37,272) $ (0.35) $ (23,467) 3,114 (193) (37,593) 1,721 (39,314) $ (0.42) $ 39 (74,151) 12,164 (86,315) $ (1.21) $ (1.21) $ 71,626 (86,315) $ (220) 4,928 3,816 1,112 0.02 0.01 71,026 1,112 110,326 $ (106,298) $ 105,980 (37,272) $ 92,599 (39,314) $ (1,581) (1,581) S (107,879) $ 631 631 (36,641) $ (188) (188) (39,502) $ (1,085) (1,085) (87,400) $ 620 620 1,732 Source: Compiled by the author from American Apparel's annual reports, year 2009 - 2013. American Apparel, Inc., Edgar Online, accessed March 27, 2016.

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

Leverage Ratio Analysis

• Ratio of Total Liabilities-To-Total Assets
• Ratio of Long-Term Liabilities-To-Equity
• Ratio of Total Liabilities-To-Equity

Coverage Ratio Analysis

• Interest Coverage Ratio

Liquidity and Solvency Ratio Analysis

• Current Ratio
• Quick Ratio

Efficiency Ratio Analysis

• Working Capital Turnover
• Inventory Turnover
• Receivable Turnover

Profitability Ratio Analysis

• Net Profit Margin Ratio
• Gross Profit Ratio
• Rate Earned on Equity
• Rate Earned on Assets

Cash Performance

• Operating Cash Return on Equity
• Operating Cash Return on Assets
• Operating Cash Return to Revenue

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

Answer 1

A) Leverage Ratio Analysis 1. Ratio of Total Assets to Total Liabilities = Total Liabilities/Total Assets This ratio provides a picture of the company's assets which are financed through debt If the ratio is less than 0.5 then most of the company's assets are financed through equity. If the ratio is more than 0.5 then most of the company's assets are financed through debt. Since total assets and total liabilities are given in the question itself, no need of computing total assets and total liabilities Particulars Total Assets Total Liabilities # Ratio (#/*) 2013 333752 411156 123.19% 2012 328212 306128 93.27% 2011 324721 276591 85.18% 2010 327950 252926 77.12% 2009 327579 170238 51.97% II. Ratio of Long term Liabilities to Equity = Long term debt / Equity It implies that leverage that the business has taken, when the ratio is high it implies that the business at greater risk of bankruptcy, and it may not be able to pay the interest on its debts when the cash flows decline. Particulars 2013 2012 2011 2010 2009 Long Term debt * 24916714451913324138775 105358 Shareholders Equity # =77404| 22084 48130 75024 157341 Ratio (*/#) -3.221 6.54 2.77 0.52 0.67

III. Ratio of total Liabilities to Equity = Short term +Long Term debt / Shareholders Equity It is used to evaluate company's Financial Leverage. Particulars 2013 2012 2011 2010 2009 Total Liabilities * 411156 306128 276591 252926 170238 Equity # -77404 22084 48130 75024 157341 Ratio (*/#) -5.31 13.86 5.75 3.37 1.08 2011 B) Coverage ratio Analysis Interest Coverage Ratio = EBIT / Interest expense Particulars 2013 2012 Earnings / Loss BIT -65241 8100 Interest Expense 39286 41559 Ratio -1.66 0.19 -4427 33167 . -0.13 2010 -50399 23752 -2.12 2009 27555 22627) 1.22 2009 Calculation of Earnings Before interest & Taxes Particulars 2013 2012 Net Income/ (Loss) (a) -106298 -37272 Tax Expense (b) 1771 3813 Interest (c) 39286 41559 EBIT (a+b+c) -65241 8100 2011 -39314 1721 33167 -4426 2010 -86315 12164 23752 -50399 1112 3816 22627 27555

C) Liquidity & Solvency Ratio 1. Current Ratio = Current Assets / Current Liabilities It determines the Liquidity of a company's assets towards it working capital needs The ideal Current ratio is 2:1 i.e more liquidity Particulars 2013 2012 2011 2010 2009 Current Assets 215296 224390 230730 216537 186303 Current Liabilities # 161989 161609 143350 214151 64880 Ratio (*/#) 1.33 1.39 1.61 1.01 2.87 II. Quick Ratio = Cash + Cash Equivalent+ Short term Invts+Current Receivables / Current Liabilities It determines the company's ability to pay its current liabilities with its quick assets. Particulars 2013 2012 2011 2010 2009 Cash (a) 8676 12853 10293 7656 9046 Current Receivables (b) 20701 22962 20939 16688 16439 Quick Assets (a+b) - * 29377 35815 31232 24344 25485 Current Liabilities # 161989 161609 143350 214151 64880 Ratio (*/#) 0.18 0.22 0.22 0.11 0.39

D) Efficiency Ratio Analysis I.Working Capital Turnover = Net Sales / Working capital Working Capital = Current Assets - Current Liabilities Particulars 2013 2012 2011 Sales * 633941/ 617310 547336 Working Capital # 53307 62781 87380 Ratio (*/#) 11.89 9.83 6.26 2010 532989 2386 223.38 2009 558775 121423 4.60 Computation of Working Capital Particulars 2013 Current Assets * 215296 Current Liabilities # 161989 Working Capital (*-#) 53307 2012 224390) 161609 62781 2011 230730) 1433501 87380 2010 216537 214151 2386 2009 186303 64880 121423) II. Inventory Turnover = COGS / Average Inventory Particulars 2013 2012 COGS 313056 289927 Average Inventory 171803.5 179996.5 Ratio 1.82 2011 2010 252436 253080 181908) 159643.5 1.39 1.59 2009 238863 144694.5 1.65 1.61 Average Inventory = Opening Inventory + Closing Inventory / 2 Particulars Opening Inventory Closing Inventory Average Inventory 2013 174229 169378 171803.5 2012 185764 174229 179996.5 2011 2010 178052 141235 185764 178052 181908 159643.5 2009 148154 141235 144694.5

Note : - All the Amounts except Ratios are denominated in $.