Will Overstock make it to next Christmas?

A financial analyses of an Internet Stock: Overstock (OSTK)

With the economic crisis getting deeper and deeper, I start to wonder which Internet retailers will be around next year shopping season. With Internet retail sales down 1% in October year on year, and forecasts for 2009 painting doom scenarios, Internet retailers should make sure their balance sheets are healthy and solvent. Which companies will survive, which E-retailers will fold?

Just last week, the Wall Street Journal is reporting eToys will probably close down shop, as The Parentcompany (Symbol: KIDS) is having difficulty repaying loans. With less consumer spending, this call will probably be best for shareholders. Why wait until Chapter 11?

Like many online retailers, the eToys site is heralding big holiday discounts to attract shoppers–"Smart Moms Shop by Saving," says the company's Web site. But if reduced consumer spending patterns are any indication, eToys may be headed for Bankruptcy 2.0.

If I look at the financial numbers of The Parentcompany, it all makes sense. The current stock price for The Parentcompany is $0.10, down from ~$6 earlier this year. The graph of the stock looks pretty bad:

Financial breakdown of The Parentcompany

Looking at the important ratio's*:

  • Cash ratio: 0.007 (A healthy number here is considered to be around 0.5. This shows how much cash is directly available to pay off the bills)
  • Quick ratio: 0.057 (Most people look for a quick ratio greater than 1.0 to be sure there is enough cash on hand to pay bills and keep going)
  • Current ratio: 0.924 (As a general rule, a current ratio of 1.5 or greater can meet near-term operating needs sufficiently. A higher current ratio can suggest that a company is hoarding assets instead of using them to grow the business -- not the worst thing in the world, but it's something that could affect long-term returns)

All these three look really bad! If you look closer at the income statement, it shows this company is in trouble.



Cost of Revenue


Operating Expenses


Operating Income


Net Income


In the third quarter of this year, this company has lost more than $7.5 million dollars. Now one quarter won't break a company, but over the last four quarters, The Parentcompany has seen more cash outflux, than cash coming in: $4.32 million. With only ~$1.5 million in cash or short term receivables on their balance sheet, the future of The Parentcompany does not look rosy indeed.

Other E-retailers in trouble: Overstock

This financial research exercise made me wonder if there are any other e-retailers I can spot that are in severe troubled water. One other I quickly found is Overstock (Ticker: OSTK). Let's have a look at the stock price:

Financial ratio's Overstock

For Overstock the ratio's are looking a little better than for The Parentcompany:

  • Cash ratio: 0.544
  • Quick ratio: 0.67
  • Current ratio: 1.419

These do not imply a direct threat to the company. But there are other warning signs Overstock might not make it to next year's Christmas shopping season:

The Current Liabilities to Net Worth of Overstock and the Total Liabilities to Net Worth, are both on levels which are not preferred for stockholders, 0.55 & 1.03 for the two.

For the Current Liabilities to Net Worth a score below 0.5 is preferred. A ratio of .5 or higher may indicate inadequate owner investment or an extended accounts payable period. Care should be taken not to offend your vendors (creditors) to the extent it affects your ability to conduct day to day business.

For the Total Liabilities to Net Worth a score below 1 is preferred. A ratio greater than 1.0 should be avoided; since it indicates the creditors have a greater stake in the business than the owners.

What more is interesting for Overstock is to look at the income statement sheet for Q3-08:



Cost of Revenue


Operating Expenses


Operating Income


Net Income


The Net loss in Q3 should be manageable for a listed company as big as Overstock. However, the last couple of quarters there was a Net Cash out flux of $30.36 million. With just over ~$53.6 million in short term assets available, Overstock should cut down in fixed costs as early as possible.

At the last reporting of the Q3 numbers, Overstock reported they had 844 employees. As the Overstock headquarters is located in Salt Lake City, I checked the average salaries in Salt Lake City:

Let's just say for simplicity an average worker for Overstock costs them around $160K per year, which includes salary & benefits. The quarterly cost for keeping the staff employed will already cost Overstock: $33.8 million. The Net loss per employee at the moment is: $1.884 per quarter.

This all would not necessarily put Overstock in a bad place to be, as the company could raise new debt or stock equity through another public offering of stock. However, the market for credit has pretty much dried up, and the stock has taken a hit this year.

Next to all this, Overstock is in a business segment which people will spend less on next year. If you have less money, what would you save on first? Right luxury products you do not really need! All what is important if you lose your job, is: food, rent or mortgage insurance and clothing. You don't need to buy those new sky shoes or jewelry for Valentine's Day. Even if these products are on a discount.

I would not put any money in Overstock at the moment!


Would you like me to analyze another stock? Which one would you like to see discussed here? Please let me know through my contact form.


I'm not an investment analyst! I have a major in finance and investing. I've had moderate success in investing myself, mostly with stock picking based on financial analyses like above here.

Learning how to read a balance sheet, income statement and cash flow statement should be more common practice for anybody wanting to invest in the stock market. It puts the emotional factor in perspective. Always take advice with a grain of salt and invest on your own research.

I will take no responsibility on any investment decisions made based on the above research. All the numbers used in the analyses on the stock on TheNextCorner are freely available. I don't use inside information, as using inside information is illegal!

Companies going bankrupt has a serious impact on peoples life. I sincerely hope all 844 employees of Overstock will do fine in 2009. My analysis is based on historical numbers. Who knows what next year will bring. I might be completely wrong in my predictions. At that moment, my crystal bowl is going out the door!

I'm long in Apple, the only stock I currently have in my portfolio. I pulled all my money out of stock, as I might need it in the short term.

*All numbers are based on Q3 filings.