Discussion Responses # 6

Jonathan’s Post

Hello classmates,

My analysis will continue for Gamestop, Inc. (NYSE: GME) for the first segment, and I will use Best Buy as a comparison (NYSE: BBY).

Below are the common-size balance sheet, income statement, and statement of cash flows for Gamestop, followed by the same for Best Buy.

Balance Sheet - Gamestop

Income Statement - Gamestop

Statement of Cash Flows - Gamestop

Balance Sheet – Best Buy

Income Statement – Best Buy

Statement of Cash Flows – Best Buy

Benefits of Common-Size Financial Statements

Common-size statements are beneficial for comparing different time series as well as different companies. For time series, because the changing value of the dollar is somewhat negated or minimized, you can remove that variable and compare what portion of a total category each financial line item is rolling up as. When considering different companies, as in this example, it allows you to compare companies of different sizes more easily by using ratios as opposed to only having raw dollar figures that may give a different perception (Porter & Norton, 2018).

Vertical Analysis

Taking a look at cash and current assets across both sets of vertical analyses, it is interesting to note that both companies comparatively have kept a similar percentage of cash on hand in the range of 14% to 29%, although Best Buy carries a significantly higher valued inventory that brings a heavy percentage to its current asset line compared to Gamestop, which is to be expected due to the specialty of the Gamestop market of items.

Regarding the income statements, the ~10% difference between Gamestop and Best Buy really makes the difference in profitability for the selling, general, and administrative financial line. This would be the difference for profitability for Gamestop, where Best Buy continues to hover around the 17% mark year over year.

Lastly, taking a look at the cash flows, Best Buy has made significant efforts to pay down debt, in that the line item is almost a 60% impact relative to the total cash flows for the periods in question, where Gamestop is impacting cash flows of about 23%.

Financial Conditions for Gamestop & Best Buy

This comparison shows me that Best Buy is performing better from a percentage of operating costs perspective, able to maintain enough sales to justify operating expenses, unlike Gamestop. Gamestop’s financial condition using this analysis is not necessarily new news after the discussions over the past several weeks, but it does provide a framework for added doubt that unless Gamestop can cut operating costs by 33%, it will be difficult to turn a profit in the near future. Additionally, it shows that Best Buy is performing at a better level and is working to pay down debts at a higher rate to put the company in a better financial position. Recent trading behavior regarding options trading echos this sentiment, that Best Buy is making strides towards a more secure financial future where expectation is for Gamestop to continue to decline (Conway, 2010).

Thank you,

Jonathan

Conway, B. (2010, June 16). A tale of two trading arenas for Best Buy, GameStop. The Wall Street Journal Eastern Edition, 0(0). Retrieved from https://library.uagc.edu/index.aspxLinks to an external site. Gamestop (2022). 2021 Annual Report - Investor Relations. Gamestop. Retrieved from https://news.gamestop.com/Links to an external site. Gamestop (2021). 2020 Annual Report - Investor Relations. Gamestop. Retrieved from https://news.gamestop.com/Links to an external site. Porter, G., & Norton, C. (2018). Using financial accounting information: The alternative to debits and credits (10th ed.). Retrieved from https://www.cengage.comLinks to an external site.

Vivek’s Post

Common-Size Balance Sheet

Item 2022 Common-size 2021 Common-size

Cash and cash

equivalents 9,519 10.26 9,684 10.26

Short-term

investments 1,043 1.12 1,242 1.32

Marketable

securities 1,069 1.15 1,699 1.80

Trade AR 3,487 3.76 3,512 3.72

Inventories 4,233 4.56 3,414 3.62

Prepaid

expenses 3,240 3.49 2,994 3.17

Equity method

investments 18,264 19.69 17,598 18.65

Other

investments 501 0.54 818 0.87

Other non-

current assets 6,189 6.67 6,731 7.13

Deferred

income tax 1,746 1.88 2,129 2.26

PPE net 9,841 10.61 9,920 10.51

Trademarks 14,214 15.32 14,465 15.33

Goodwill 18,782 20.24 19,363 20.52

Other

intangible

assets

635 0.68 785 0.83

Total assets 92,763 100.00 94,354 100.00

Common-Size Income Statement

Item 2022 Common-size 2021 Common-size

Net operating

revenues 43,004 100.00 38,655 100.00

Cost of goods

sold 18,000 41.86 15,357 39.73

Gross profit 25,004 58.14 23,298 60.27

Operating income 10,909 25.36 10,308 26.67

Interest income 449 1.04 276 0.71

Income before

income taxes 11,686 27.17 12,425 32.14

Consolidated net

income 9,571 22.26 9,804 25.36

Income

attributable to

shareholders

9,542 22.19 9,771 25.28

One of the major competitors to Coca-Cola is PepsiCo. Its common-size statements are as follows:

Item Common-size 2022 Common-size 2021

Cash and cash equivalents 5.37 6.06

Short-term investments 0.43 0.42

Restricted cash 0.00 0.00

Accounts receivable 11.02 9.40

Inventories 5.66 4.71

Prepaid expenses 0.87 1.06

Assets held for sale 0.00 1.94

Current assets 23.36 23.58

Intangible assets 36.65 40.10

Other assets 5.74 4.85

Non-current assets 76.64 76.42

Common-size income statement

Item Common-size 2022 Common-size 2021

Net revenue 100.00 100.00

Cost of sales -46.97 -46.65

Gross profit 53.03 53.35

Operating profit 13.33 14.04

Net interest expenses -1.09 -2.94

Income before income taxes 12.39 12.36

Net income 10.39 9.66

Net income attributable to the

company 10.31 9.59

Net income available for

shareholders 10.31 9.59

Common-sized financial statements are a convenient way to compare financial statement items because the items of the statements are displayed as a percentage of a given common figure. This approach creates a common size for the financial statements thereby making it simplified to analyze a company within a specified period or industry.

In the balance sheet of Coca-Cola, an item like inventories increased from 3.62 in 2021 to 4.56 in 2022. However, the competitor company PepsiCo, the inventories increased from 4.71 to 5.66. Likewise, in the income statement, an item like gross profit declined from 60.27 in 2021 to 58.14 in 2022. However, for PepsiCo, the gross profit declined from 53.35 to 53.03.

The comparison shows that Coca-Cola’s current financial performance is not very strong compared to that of PepsiCo. However, the gross profit for Coca-Cola was better both for the current year and the previous year. The results clearly show that PepsiCo is the major competitor of Coca-Cola in the industry and competes with it in various critical aspects.