Financial statement analysis is generally performed on companies to determine the health of the firm. In this
Question:
Financial statement analysis is generally performed on companies to determine the health of the firm.
In this problem, you are asked to look at GameStop as a potential stock investment. Review the firm to see whether you would recommend the purchase of their stock to add to a diversified portfolio.
GameStop is a real company, based in Grapevine, Texas. It is a publicly traded firm whose video gaming retail stores are in many malls throughout the country. Before looking at the financial statements, understand the business model of the company. They buy video games (software), then turn around and sell them to the ultimate consumer. You may be a video game player (or at least know one) which could help you understand the demand for their product. If you need some more information about the company, go to the company's website, Google finance, or Google them yourself. To aid in your analysis of GameStop’s financial statements, their financial statements are already loaded into Excel below. A copy of Dun & Bradstreet industry norms are also attached below. Although the industry norms are only for 2004, assume those norms are constant through the time period in question (our library only has access to that year). Use the column associated with SIC 5734 for comparison.
In responding to this question, please write a brief synopsis of your findings. Use good grammar and syntax. In the write-up, use a DuPont framework to analyze how the return to the equity investor has changed – and what the underlying causes were. You may discuss how those ratios have changed over time, how they compare to the industry norm, etc. You may discuss any other statistics regarding GameStop, but structure it in a DuPont framework, to explain directly what that measure has to do with return to the equity investor. Make sure you conclude with a recommendation of investing in the stock or not.
Analysis note: This Company reports the impairment of goodwill in their 2013 income statement.
Goodwill represents value paid for the acquisition of another company in excess of the sum of the accounting value of its assets (at the lower of cost or market). In other words, GameStop paid more for a company than its physical assets were worth. The value of most companies should be more than the value their underlying assets (e.g. there may be value in a brand name, reputation, etc.). The impairment of goodwill is when management determines that they overpaid for an acquisition – even taking into account these intangible values. When they recognize goodwill is overstated, they must mark it down to market. It is often done in large chunks. It is done “when management realizes it”, rather than matching the costs to revenues (or anything else). And some managers “realize it” when the timing is more advantageous.