Question

potential problem areas in the American Apparel company as reflected in the financials?

Answer 1

American apparel Inc is a cloth designing and manufacturing company having headquarters in Los Angeles, California ,US .In 2015 American apparel filed for Chapter 11 Bankruptcy in US Bankruptcy Court for the central district of California and in January 2017 Gildan Activewear purchased American Apparel intellectual property and all other assets.

Potential problems reflected in financials  that cause bankruptcy to American Apparel Company were:

High Debts:Despite of many tactics applied by company to repay its debts company was unable to keep there lenders happy and lenders keep loosing interest in the company due to unavailability of company to pay its debt.

High litigation Cost: Second quarter of 2015 shows up a very high litigation cost as compared to second quarter of 2014 . It almost shows an increase in litigation cost of almost 1.4 million$.That was one of the major reasons of company's financial position as high litigation cost means company is not working as per rules and regulation and performing out of the box .

Continued Losses : As we know apparel business is very dynamic . Fashion changes overnight . Changed fashion can bring the business from floor to roof and the same time from roof to floor . And for American Apparel changed fashion affected them adversely .and till 2015 they faced continuous losses for several years and that cause bankruptcy too.

Low Liquidity : Liquidity is one of the most important component for running a business smoothly . We have seen that despite of having sound financial position company has gone under liquidation id due to poor liquidity . Because due to poor liquidity company is unable to make in time payment to creditors ,lenders and that harm company's reputation too and that was too happened with American apparel and cause problems in financials.

So above are the main problem areas in American Apparel Company that was reflected in their Financials.