There are a lot of companies worth investing in around the country and the world. An investor cannot simply put his money into a company without doing some research beforehand. Using ratios, balance sheets, income sheets, and other financial information, a potential investor has a lot of resources to use to ensure a good investment is made. Considering the financials of each company can be reviewed from year to year, a potential investor is able to research trends from year to year of whatever company they might want to invest in.
Based on my general knowledge of the gaming industry, I would consider investing in GameStop because gaming seems to be a booming industry. With all of the commercials on television for new releases, new consoles being developed every couple of years, and even competition gaming it seems that this industry is going to continue to climb. Since GameStop specializes in this industry and no other, I would consider it a safe investment even without doing any research on the company. GameStop is a small retailer that specializes in video game hardware and software.
The company also runs Kongregate, which is an online browser based game website allowing players to play smaller games. Kongregate makes its money using micro transactions, which are smaller transactions within the games. GameStop sells new and used hardware and software games on console, and also sells new computer based games as well. GameStop has over 6,500 actual locations spread throughout multiple countries along with a website through which more business is conducted. It is a leader in the gaming industry and is ranked 262 on the Fortune 500 list.
Its main competitors are retail giants such as Wal-Mart and Best Buy who sell the same blockbuster titles as well. A horizontal analysis of the company shows the following for three years ending January 2011. GameStop Income Statement Year Ending200920102011 Sales100%100%100% Cost of Sales74. 2%73. 2%73. 2% Gross Profit25. 8%26. 8%26. 8% Operating Expenses7. 7%7. 4%7. 4% Income before tax7. 2%6. 5%6. 6% Income taxes2. 7%2. 4%2. 3% Net income4. 5%4. 1%4. 3% The horizontal analysis is important when researching any company because it compares the company’s numbers side by side for two or more financial periods.
Basically, you can look over multiple years once the analysis is put together and see where the company has improved and declined, and whether or not the profits have gone up or down from year to year. In the example of GameStop, we can see that gross profit increased slightly from 2009 into 2010 and stayed at the same number going into 2011. The horizontal analysis is the quickest way to look at the trends from year to year when you want to see a high level overview of a company, and deciding whether it warrants more research or not.
Over the past few years GameStop has shown a small drop in their net income, which would indicate the trouble the economy has been having over those years. The cost of goods did decrease while gross profits increased each year, which means they were able to acquire goods for less and sell for more. This shows that their pre-owned game sales likely increased due to the economy. Operating costs did drop slightly going into 2010 and maintained the same cost going into 2011, which means they did not put much more into their operations, but it also means they were probably unable to find a way to cut costs.
This can be difficult if they rent because some places have a fixed amount of rent while others may rise and lower depending on realty in the various areas. The current ratio for GameStop year ending 2010 was 1. 28 whereas the year ending 2011 dropped to 1. 23. This seems to indicate that that the company’s ability to pay all of its short term liabilities fell slightly. This could indicate a drop in assets or even that the company reinvested in expanding its operations.
Because the ratio dropped over the course of the two years does not necessarily mean that the company is not still in good standing, there are many things that could affect the ratio. From the balance sheets, it looks like the assets did not increase as much as the current liabilities, meaning operations could have been expanded while sales fell, or even that business slowed down and operational expenses could have increased. Overall, GameStop’s assets did increase from 2010 into 2011 while the liabilities decreased slightly. The quick ratio showed a slight decrease from 0. 5 in 2010 to 0. 51 in 2011. This appears to be mainly caused by a rise in inventory that was not able to be sold by the end of the year. At the year end of 2010 the company’s inventory was marked at 1,052. 6 million dollars, and at year end in 2011 it was marked at 1,257. 5 million dollars. Sales of new hardware fell from 2010 into 2011 because no new systems were released. The sales declined from 2009 into 2011 by 140. 2 million dollars, which would account for the company’s quick ratio declining between the two years. GameStop’s gross profit for new hardware actually increased by 7. % going into 2011 which would indicate that there were drops in the cost of the new hardware. There was actually an increase in the fiscal year of 2011 of 4. 4%, which would indicate that even with the lower numbers the company actually did better for the previous year. The cash to current liabilities ratio also dropped slightly from 0. 55 in 2010 to 0. 41 in 2011, which simply indicates a small drop in liquid assets that GameStop has available. After looking at the balance sheet between 2010 and 2011, the company had a significantly smaller amount of cash on hand which can explain the drop.
This does not mean that GameStop is doing any worse as there are several explanations for this. If a company has too much cash on hand, it can mean that they are not expanding their business or trying to reinvest in the company to try to earn more revenue. Most companies will not keep a lot of cash on hand, so the cash to current liabilities ratio should not be given too much weight when considering an investment. After looking through the company’s financials, it seems that all of the numbers here are essentially straight forward. I do not see anything outside of normal reporting and a typical year that would cause the numbers o be either inflated or deflated within the year end reports. The company’s assets barely rose between 2010 and 2011 and there was almost an equal fall on the liabilities which helped keep the company somewhat balanced. Based on the most recent numbers, it seems that GameStop had less assets on hand that could be considered liquid. This is likely due to the increased inventory on hand that was not sold during the fiscal year. Even though the company technically had more assets, less of it was considered liquid because it was in inventory, less current assets, a drop in intangible assets, and a rise in current liabilities.
GameStop went from 1,655. 7 million in 2010 up to 1,747. 8 million in 2011. The factor that made up the bulk of this difference was accounts payable, which indicates that there were probably loans taken out to cover the expansion of the company. Since the only real direct competitors of GameStop are giant retailers like Best Buy and Wal-Mart, they probably have more liquid assets available. GameStop does not have much in the way of liquid assets because they are still working on expanding even more. Between 2010 and 2011, total store numbers increased from 6,450 to 6,670.
This is why cash and liquid assets are lower in 2011, because the company has been expanding and working on building more revenue up. It seems that GameStop is continuing to reinvest in itself by expanding and making the company available to more consumers. I think that GameStop would be a good company to invest in, and I would personally make some sort of investment if I had the resources to do so. From what I can gather by looking at the balance sheet, sales have steadily increased over the past few years and the company has been expanding.
Since GameStop is working toward expanding and improving its business, it is a safe assumption that revenue should increase in the future, especially when new consoles are eventually introduced into the market from Microsoft and Sony. The only risk that I see with GameStop is that their liquid assets seem to be decreasing from year to year, at least in the past few years. This is probably mostly due to an increase in buildings, property, fixtures, and the hiring of new employees to work in the new locations.
If they keep expanding and the profit margin keeps shrinking it will come to the point where the company starts losing money. I would really suggest waiting at least a quarter to see if trends improve and advising to invest if the profit did increase over that quarter. Doing the research on a company you are considering investing in is completely worth the time required to do a thorough analysis of the company. Once the research has been completed, you will be able to make a fair analysis of the company simply utilizing information available provided by whatever company you are investigating.
By running a horizontal and ratio comparison, a company’s financial portfolio becomes almost transparent and trends, profits, losses, and expansion can all be seen at the top level view. References: GameStop. (2011) About GameStop. In News from GameStop. Retrieved November 1, 2012, from http://news. gamestop. com/about_us Gamestop. (2011) Annual Reports. In GameStop Corporate Information. Retrieved November 1, 2012, from http://phx. corporate-ir. net/phoenix. zhtml? c=130125&p=irol-reportsannual Walther. (2012). Principles of Accounting: Volume I (1st ed. ). San Diego, CA: Bridgepoint Education, Inc