Why Did RadioShack Corporation Become This Week's Best Stock?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of RadioShack (NYSE: RSH  ) shot 40% higher today, capping a week in which they've already more than doubled in price, following reports that the troubled electronics retailer might receive a desperately needed cash infusion  from one of its largest shareholders.

So what: RadioShack's meteoric recovery from sub-dollar share prices began in earnest earlier  this week following revelations that hedge fund and 10% stakeholder Standard General LP has entered discussions with company management over ways to raise new funds and refinance existing loans.

A Bloomberg report, published after yesterday's closing bell, appears to have been the driving force behind today's megapop. It claims that Standard General -- which has already put its money behind struggling American Apparel in a similar show of support -- is trying to "salvage [its] investment" through cash infusions and through the refinancing of a $250 million second-lien term loan. Without such efforts, RadioShack may run out of cash by some point next year, which would force it to declare bankruptcy, something many analysts have been anticipating for some time.

Now what: The Fool's John Maxfield has already put together an excellent "Framework for Predicting Failure" highlighting RadioShack's perilous financial state, which should be recommended reading for anyone considering investing in RadioShack after today's pop.

Over the past five fiscal years, RadioShack has swung  from generating $165 million (in the dark times of 2009, no less) in free cash flow to bleeding out $111 million in negative free cash flow in FY 2012. It's since recovered somewhat to lose only $69 million over the past four quarters, but in this time its cash on hand has plunged  from more than $900 million to just $61 million today. New money might postpone insolvency, but RadioShack has yet to show investors that it's capable of reversing a deterioration in its business model that's been years in the making, and that's the only thing that matters in the long run. Companies on the brink have been known to yo-yo violently, but that's not a reason to start buying in.

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