GameStop Corp (GME).
Gamestop Corp Balance Sheet
Liquidity measures help us to ascertain the ability of a certain company to pay operating expenses and other short-term or current liabilities. Liquidity measures are calculated using current assets and liabilities. The reason behind this is because current liabilities are debts that must be paid or obligations that must be fulfilled within 1 year. And also, they are paid out of current assets which are received as cash or otherwise used within 1 year.
On an extra note, low liquidity measure would indicate either one company is having financial problems or is poorly managed; hence, a fairly high liquidity ratio is good. However, it shouldn’t be too high, because excess funds incur an opportunity cost and can probably be invested for a higher return. And current ratio gives an investor a better idea of how much safety a company has in paying its current liabilities regardless of the size of the company.
GameStop Corp. showed a good current ratio. As opposite, the quick ratio declined and a bit low percentage and net working capital also depicted a lower but still sufficient amount which would be essentially the cash needed to run the business.
GameStop Corp. had a good current ratio, meaning they have more current assets than current liabilities. However, growth dipped down by -18 percent in 2009, and following years by 10, -3.9, and 0.8 with an average of 1.26 times. Its quick ratio went the same as current ratio, but without the value of inventory and prepaid expenses in the numerator. This showed a down and up trend with a growth ratio of -43 percent, 44, -25 and 0. The net working capital ratio or the result of working capital against total asset displayed a positive low amount of working capital and has a growth ratio of -57 percent, 67, -20, and -12.5.
When it comes to GameStop Corp. had a high receivable turnover ratio meaning a fast turnover in receivable collections or receivables quickly turn to cash which was favorable for the company to use and invest cash in their operations. A decreasing and lower inventory turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances, a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.
Their accounts payable turnover played around 6 to 7 times a year. This means a higher ratio is more favorable as payables are being paid more quickly. Nelly told me that the higher the fixed asset turnover ratio, the better because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue. With GameStop Corp., they had a declining ratio during 2010 and 2011 may indicate that the business is over-invested in the plant, equipment, or other fixed assets. The good news was, the company recovered to increase at 1.7 percent in 2012.
Let’s have a look at the table below.
The receivable turnover ratio measures the number of times receivables are collected during the period. Wherein GME showed a down and uptrend with a growth ratio of -8.1 percent, -3.2, 4.7, 0.5 and average of 149.91 times.
The inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. This showed a decreasing trend with a growth ratio of -2.65 percent, -10.34, -3.85, -4.33 and an average of 6.42 times.
Accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. It is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period. GME depicted an up and down trend with a growth ratio of 2.2 percent, -4.34, 5.45, 7.6 and an average of 6.95 times.
Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the value of fixed assets (on the balance sheet). It indicates how well the business is using its fixed assets to generate sales. Just like accounts payable turnover ratio, it also showed an up and down trend with a growth ratio of 13.3 percent, -3.49, -1.25, 1.7 and an average of 15.84 times.
Cash Conversion Cycle
Cash conversion cycle validates the effectiveness of the company’s resources in generating cash.
Receivable conversion period measures the number of days it takes a company to collect its credit accounts from its customers. This show a growth ratio of 9 percent, 3, -4.6, -0.40 with an average of 2.49 days for GameStop Corp.
The days’ sales in inventory or inventory conversion period tell the business owner how many days, on average, it takes to sell inventory. GME had a growth ratio of 2.7 percent, 11.6, 3.9, and 4.6 with an average of 57.27 days. The usual rule is that the lower, the better since it is better to have inventory that sells quickly than to have it sit on the shelves.
While payable conversion period measures how the company pays its suppliers in relation to the sales volume being transacted. This showed a down and uptrend for the last five years with a growth ratio of -2.1 percent, 4.5, -5.2, -7 and an average of 52.61 days to pay its suppliers.
Cash conversion period decreased by -0.65 days during 2008 but it subsequently increased yearly, with a growth ratio of 3.4 percent, 1.81, 0.86, 0.59 and an average of 7.14 days.
I remember Nelly said “The lower the percentage, the less leverage a company is using and the stronger its equity position.” Or if we put in layman’s term, it goes as, the higher the ratio, the more risk that company is considered to have taken on.
The debt ratio compares a company’s total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. This depicted a decreasing trend with a growth ratio of -4 percent, -8, -4.4, -14 and average of 45 percent.
- The debt-to-equity ratio is a measure of the relationship between the capital contributed by creditors and the capital contributed by shareholders. This also showed a decreasing trend with a growth ratio of -5.8 percent, -15.5, -8.5, and -21.3 with an average of 83 percent.
- The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the firm’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. This showed a favorable solvency ratio which has an increasing trend with a growth ratio of 23 percent, 19.8, 91, and 100 with an average of 107 percent.
Major Control of the Company based on Total Asset
- Current liabilities to total assets identify how much will be claimed by the creditor against total assets. This showed an up and down trend for the last five years with an average of 34 percent.
- Long-term debt to total assets, on the other hand, is to make out how much claim has the banks or the bond holder against its total assets. This show a decreasing trend with an average of 8 percent.
- Then, stockholders equity to total assets is to know how much the owner can claim in its total assets which showed an increasing trend with a growth ratio of 4 percent, 7.8, 3.6, and 10.5 with an average of 55 percent for five years.
Based in GameStop Corp total five years of operation the majority in control of their total asset are their stockholders at 55 percent than their creditors of 34 and last to their bank/bondholder at 8 percent average.
Plant, Property & Equipment
- Gross plant, property, and equipment is the gross total of fixed assets cost, this shows a trend that was increasing yearly for the last five years. It has a growth ratio of 16.8 percent, 14.8, 13.9, and 5.8 with an average of 1,236 million dollars for five years.
- Accumulated depreciation is to reduce the carrying value of an asset to reflect the loss of value due to wear, tear, and usage. Wherein it shows a yearly growth trend with an average of 669.8 million dollars which is 54 percent of the average cost of plant, property, and equipment.
- The net plant, property, and equipment is the result after deducting the accumulated depreciation from gross PPE, this showed a gradual increase yearly with a dip down in 2012 of -6.7 percent. It has an average of 566.2 million dollars which is 45.8 percent of the average cost.
- Looking into its fixed assets is to if they still have a useful life in their business operations. Therefore, based on the above data, the remaining book value of PPE was 45.8 percent, using the percentage method of depreciation; this means it has 2.29 useful years remaining.
Gamestop Corp Income Statement
An income statement allows a business as well as the investors themselves, to understand if the company is operating efficiently and successfully.
The graph below will show us how the trend goes for GameStop Corp.
- Their net margins or the after tax profit a company generated for each dollar of sales showed an up and down trend with a growth ratio of 11.3 percent, -7.96, 3.6, -17.4 and trailing twelve months of 3.55 percent.
- Their asset turnover which measures the effectiveness of the company to convert its assets into revenues likewise depicted an up and down trend with a growth ratio of 6.53 percent, -9.43, -1.56, 2.12 and a trailing twelve months of 2.09 percent.
- The return on assets, this tells us how much profit the company generated for each dollar of total assets. This showed up and down trend with a growth ratio of 18.7 percent, -17.06, 2.13, -15.7 and trailing twelve months of 7.43 percent.
- The company’s financial leverage this measures the financial structure ratio of the company base on total assets against total stockholders equity. This showed a decreasing trend with growth ratios of -3.44 percent, -7.14, -3.85, -9.14 and trailing twelve months of 1.48 percent.
- Their return on equity the company could return such profit percent for every dollar of equity. This depicted an up and down trend with growth ratios of 7.46 percent, -21.5, -3.32, -21.1 and trailing twelve months of 11.16.
- Their return on invested capital, this is the financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. Same as return on equity it has an up and down trend with a growth ratio of 21.8 percent, -16.8, 3.03, -14.9 and trailing twelve months of 10.68.
GameStop Corp’s profitability indicates that in 2009 it has a good performance compared to 2008 and their subsequent years. A low net margin means lower net income earned from each dollar of revenues. Net profit margins vary by industry, but all else being equal, the higher a company’s profit margin compared to its competitors, the better. Its asset turnover ratio tends to be inversely related to their net profit margin, wherein the higher the net profit margin the lower the asset turnover. The investors can compare companies using this to determine which one is a more attractive business. And this means they earn more from revenue than converting assets to revenue.
Their return on assets depicted a fluctuating earnings for every dollar of total assets due to up and down trend in net income and total assets growth ratio yearly was an up and down trend.
In terms of their returns using the DuPont Model wherein an equity multiplier is used to measure their financial leverage allowing investors to see what portion of the return on equity was the result of debt. In the case of GameStop Corporation financial leverage was decreasing thus this indicates no difficulty in paying interest and principal while obtaining more funding. While their return on equity show a high favorable decreasing trend thus the bulk of the return comes from profit margins and sales. Likewise, the return on invested capital was fluctuating and cash flow earned from invested capital also plays unsteadily.
This show how much money in million dollars GameStop Corporation has brought in for their last five years.
- Their revenue means how much money a company has generated in terms of “sales”, representing the amount of money a company brings in for selling its goods and services. This showed an increasing trend with a growth ratio of 24.1 percent, 3.08, 4.35, 0.81 and an average of 8,800.41 million dollars.
- Gross profit shows how much markup a company receives on goods and services it sells after deducting its cost of revenue wherein it also depicts a decreasing trend. The same with revenue, GameStop Corp in an increasing trend with a growth ratio of 25.1 percent, 7.24, 4.22, 5.59 and an average of 2,347.12 million dollars.
- Operating profit is the best indicator of a company’s true performance in their operations. For this is the result after deducting all the expenses incurred in their operations, wherein it shows an up and down trend with a growth ratio of 37.6 percent, -6.09, 3.94, -13.4 and an average of 603.77 million dollars.
- Income before taxes refers to the gross taxable income of the company before deducting the income taxes. This showed a fluctuating trend with a growth ratio of 43.7 percent, -7.16, 5.58, -11.6, and an average of 566.80 million dollars.
- Net income is what’s left over for a company after all expenses have been accounted for. Likewise, this depicted an up and down trend with a growth ratio of 38.2 percent, -5.28, 8.14, -16.6 and an average of 362.35 million dollars.
Earnings for the year 2008 was good producing a 24.1 percent growth but succeeding years it went down to only 3.08, 4.35 and 0.81 which mean sales or revenue was not doing well anymore. And after deducting the cost of revenue averaging 73.3 percent, its gross profit leftover would be around 26.7 percent. This indicates that huge amount of revenue goes to the cost of revenue, represent the direct costs associated with the goods and services the company provides. Its operating profit after deducting their operating expenses accounts only 6.86 percent of revenue and income before taxes of 6.44 percent. Therefore their net income has only a merger share of around 4.1 percent, too small to pass our grade in scaling standards.
This show how much GameStop Corp. had spent (in million dollars) with their in operations and others for the last five years.
- The cost of revenue was the amount the company paid for the goods that were sold during the year. This showed an increasing trend and a slight decrease in 2012 with a growth ratio of 23.8 percent, 1.64, 4.4, and -0.93.
- Operating expense was the expenses incurred in conducting their regular operations of the business. This depicted an increasing trend for the last five years with a growth ratio of 18.3 percent, 15.2, 4.24, and 12.03.
- Provision for income tax was the amount allocated for their payment of income taxes. This likewise showed an increasing trend with a growth ratio of 23.4 percent, 3.88, 4.28 and 1.74.
- Total expenses amount averages 8,404.74 million dollars or 95.5 percent of revenue. Wherein cost of revenue is 73.3 percent, operating expenses of 19.8, and provision for income taxes of 2.4 from average total revenue of 8,800.41 million dollars.
Modified Income Statement
Nelly presented to us a graph below which further indicates the flow of their revenues, total expenses and net income in their yearly and average data. This was done, to visualize the whole picture of their business operations.
The table shows that total expenses show an increasing trend in revenue and net income slight in an upward and downward trend.
- Their gross margin indicates the percentage of revenue dollars available for expenses and profit after the cost of merchandise is deducted from revenues. And this averages 26.6 percent.
- Operating margin is the operating income expressed as a percentage of sales or revenue after deducting the operating expenses from gross profit. Which have an average of 6.9 percent?
- Earnings before income and tax (EBIT) margin is calculated through EBIT divided by net revenue. This showed an average of 6.4 percent for GameStop Corp.
- And the net margin is the net income expressed as a percentage of sales or revenue after deducting provision for income tax from income before tax. And it has a 4.1 percent average only.
GameStop Corp displayed a lower gross profit margin of 26.6 percent. This means a huge percentage goes to their cost of revenue. It had also an unfavorable operating margin with 6.9 percent ratio and lastly, a net margin of less than 10 percent. To cut this short, their operations were in bad shape to have margins below scaling standards.
Cash Flow Statement
Cash flow statement helps us determine if GameStop Corp. has available cash for their operation or if they have a good free cash flow and excess funds to refinance operations for business expansion.
Cash from Operating Activities
Cash flow from operating activities comes from their net income adding back depreciation/depletion, deferred income taxes, non-cash items and changes in working capital to get the net cash provided by operations. This showed a growth ratio of 11.2 percent, 9.09, -8.22, 5.67 and it has an average of 580.67 million dollars. It means that the company had sufficient operating cash flow.
Cash from Investing Activities
Cash flow from investing activities comes from their purchase of fixed assets, acquisition of business, and other investing activities to get the net cash used in investing activities. This showed an acquisition of business amounting -630.71 million dollars in 2009 but prior and succeeding years trend was increasing except in 2012 it abruptly declined 16 percent, with average of -325.29 million dollars.
Cash from Financing Activities
Cash flow from financing activities comes from other financing cash flow, issuance of stock in 2008 and 2009. This was used to the retirement of stocks from 2010, 2011 and 2012, and retirement of debt to get net cash provided by or used for financing activities. Cash from financing activities showed that they were active in paying off their obligations as well as the retirement of stocks the last three years.
Net Change in Cash
GameStop Corporation has a good net cash beginning and ending balances which were sufficient after the transaction has been completed and all charges and deductions related to the transaction have been subtracted. This was used to double check the result of cash from operations, investing and financing, the net change in cash. Investors can use net cash to help determine whether a company’s stock offers an attractive investment opportunity and to assess whether they have enough cash to make investments in future expansions.
Foreign exchange effects are the gain or loss on foreign investments due to changes in the relative value of assets denominated in a currency other than the principal currency with which a company normally conducts business. A rising domestic currency means foreign investments will result in lower returns when converted back to the domestic currency. The opposite is true for a declining domestic currency. This means a net change in cash had been increasing or decrease due to the effect of foreign exchange.
Free Cash Flow
To get if the company have free cash flow to be used in operations and expansions, we deduct from operating cash flow amount their capital expenditures resulting to free cash flow. showed that GameStop Corporation had sufficient free cash flow after deducting its capital expenditure. It had also a growth ratio of 14.9 percent and 31.2 from 2008 to 2010, with a slight dip of 18.07 percent in 2011 and recovered an increase of 16.76 percent in 2012. As a whole, they have an average of five years amounting to 403.63 million dollars indicating the company’s financial health.
Cash Flow Efficiency Ratio
Cash flow analysis uses ratios that focus on cash flow and how solvent, liquid, and viable the company is. Here are the most important cash flow ratios:
Operating cash flow to sales ratio measures how much cash generated from its revenue for the period and gives investors an idea of the company’s ability to turn sales into cash. This showed an up and down trend with a growth ratio of -10.2 percent, 13.8, -12.1, 4.8 with an average of 6.6 percent. The greater the amount of operating cash flow, the better. There is no standard guideline for operating cash flow/sales ratio, but obviously, the ability to generate consistent and/or improving percentage comparisons are positive investment qualities.
Operating cash flow ratio measures how much cash left after considering short debt by using the result of operating cash flow from operations over current liabilities. This has a growth ratio of -10.4 percent, 10.7, -13.1, 13 depicting an up and down trend with an average of 36.94. This showed a good liquidity in terms of using cash flow as opposed to income which is sometimes a better gauge.
Free cash ratio helps us conclude if the company will grow in the future. Through the result of operating cash flow, less dividend paid less capital expenditure over operating cash flow despite an up and down trend it still showed sufficiently the company have free cash flow.
Capital expenditure ratio measures company sustainability in maintaining their assets. This can be done by using the result of operating cash flow over capital expenditure for the period. GameStop had an upward trend except for 2011 wherein it slightly decreased to 2.99 but recover in 2012 to 3.78 with an average of 3.28. So, the company has the financial ability to invest in itself through capital expenditures (CAPEX), then it is thought that the company will grow.
Total debt ratio measures company efficiency and it is the result of operating cash flow over total liabilities. A growth ratio of -3.87 percent, 16.27, -5.47, 26.83 and an average of 28.11.
Current coverage ratio measures how much cash available after paying all its current debt. It is determined through cash flow from operating less dividend over current liabilities. The same result goes with operating cash flow ratio because for they did not have any dividend payments.
Written by Nelly
Edited by Cris