The company’s strategy determines its choice of financial decisions, and revenues depend on the effective realization of this strategy (Piper, 2010). The purpose of this paper is to demonstrate how to apply such steps of the financial assessment process as the evaluation of strategies and revenues to the analysis of Nintendo’s position in contrast to Sony’s position in the market. The paper presents the analysis of fundamentals about Nintendo and Sony and the ratio analysis to complete the review of the companies’ revenues.
Analysis of the Fundamentals
While using the data presented in the U.S. Securities and Exchange Commission (SEC) 10-K reports for Nintendo and Sony, it is important to analyze and compare the companies’ strategies (Nintendo, 2015; Sony, 2015). Appendix A presents the findings related to both companies. It is possible to conclude with the focus on the analysis of these fundamentals that Nintendo and Sony are direct competitors in the niche of producing video game consoles. Still, Sony also holds the leading position in producing audio and video electronics. Both companies follow an effective differentiation strategy to attract and retain customers.
Ratio Analysis
To conclude regarding the financial health of Nintendo in comparison to Sony, it is necessary to conduct the ratio analysis with the focus on profitability, activity, leverage, and liquidity ratios.
Profitability Ratio
To analyze Nintendo’s profitability, it is necessary to apply the formula for calculating Gross Margin Ratio (millions of yen): Gross Margin Ratio = Gross Margin / Net Sales.
Gross Margin Ratio for Nintendo = ¥220,965 / ¥504,459 = 0.44.
Gross Margin Ratio for Sony = ¥4,112,231 / ¥8,215,880 = 0.5.
The companies have almost equal gross margins that are high enough in the context of the industry. It is also important to calculate and compare the data regarding Return on Equity (ROE) following this formula: Profit after Taxes / Shareholders’ Equity.
For Nintendo, ROE = ¥16,518 / ¥11,632 = 1.42%, and for Sony, ROE = ¥137,604 / ¥33,480 = 4.11%. The higher ratio is typical of Sony, and it demonstrates more possibilities to generate profit for the company to address the shareholders’ expectations.
Activity Ratio
Activity ratios are effective to measure how the company can use the available assets. Total Asset Turnover Ratio is calculated according to the following formula: Total Asset Turnover Ratio = Net Sales / Total Assets.
For Nintendo, Total Asset Turnover Ratio = ¥504,459 / ¥1,296,902 = 0.4, and for Sony, Total Asset Turnover Ratio = ¥8,215,880 / ¥15,834,331 = 0.5. The ratios are almost equal, and they demonstrate that companies need to improve their approaches to utilizing the assets.
Leverage Ratio
To conclude regarding the financial state of the company, it is also important to pay attention to the Total Debt Ratio that is calculated using the following formula: Total Debt Ratio = Total Liabilities / Total Liabilities + Market Value of Equity.
For Nintendo, Total Debt Ratio = ¥136,001 / ¥162,781 = 0.8, and for Sony, Total Debt Ratio = ¥12,148,300 / ¥12,151,692 = 0.99. The results demonstrate that Nintendo is less dependent on loans than Sony because of differences in ratios.
Liquidity Ratio
It is also important to measure how the companies can meet their obligations to conclude regarding their liquidity. While referring to the Current Ratio, it is reasonable to use the following formula: Current Ratio = Current Assets / Current Liabilities.
For Nintendo, Current Ratio = ¥1,021,135 / ¥98,437 = 10.4, and for Sony, Current Ratio = ¥4,840,618 / ¥5,097,133 = 0.95. The ratio of Nintendo is unusually high, and it demonstrates that the company can easily meet the short-term obligations. On the contrary, Sony is oriented toward addressing long-term obligations.
Conclusion
The strategies and financial performance of Nintendo and Sony were the targets of this assignment. The financial data related to the year of 2015 were examined and analyzed with the focus on the ratio analysis. Thus, the ratio analysis conducted for Nintendo and Sony demonstrates that both companies have strong positions in the industry in terms of profitability and financial leverage results, and Nintendo demonstrates an ability to address short-term obligations as quickly as possible.
References
Nintendo. (2015). Annual Report 2015.
Piper, T. (2010). Assessing a company’s future financial health. Harvard Business School Review, 91(11), 1-17.
Sony. (2015). SEC Report 2015.
Appendix A
Analysis of the Fundamentals
Instructions
- Using the most recent U.S. Securities and Exchange Commission (SEC) 10-K reports for your company and chosen competitor, provide a brief yet succinct comparative analysis as below:
- Provide your rationale for your choice of equity valuation model: The ratio analysis is selected as an equity valuation model in order to compare the quantitative data related to the financial performance of the two companies.