Gamestop Analysis

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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...
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