STATEMENT ANALYSIS FOR NINTENDO
Statement Analysis for Nintendo Co Ltd
Introduction
This statement analysis outlines the Nintendo’s financial statements and highlights important information concerning Nintendo’s operating environment, products and services, competitive market, and the overall management structure. These relates the effects weaknesses and strengths of the firm to the company’s investment potential and credit worthiness. Findings from the analysis will be used to offer recommendations and advice on areas of weakness for the company.
Company Overview
Nintendo Co., Ltd designs, develops, manufactures, and sells equipment for home leisure. The company markets and manufactures software and hardware for home video game systems (MarketLine Report, 2014, pg. 3). Nintendo primarily operates in Japan but has a presence in Europe, Korea, Australia, and the Americas. The company is headquartered in Kyoto, Japan. Nintendo is known for the manufacture of hardware systems for video games.
Firm, Industry, and Environment
Business Segments
Nintendo runs a single operating segment involved in the development, manufacture, and distribution of home and handheld console hardware machines and related software (MarketLine Report, 2014, pg. 4). However, the single operating segment is further subdivided into five different product divisions. These divisions include handheld software, handheld hardware, home console software, home console hardware, and other.
Major Products and Services
Major hardware products from the company include handheld video game systems and home console video game. The game console comprises of Wii and GameCube Systems while the handheld system is made up Nintendo DS, GameBoy, and Nintendo 3DS (MarketLine Report, 2014, pg.4). Another prominent product from the company includes the ‘Wii Fit’ home fitness game that features a Wii Balance Board (pressure-sensing mat) that helps players to head virtual soccer balls, in addition to enabling them to, experience ski jumping effects on a television screen (MarketLine Report, 2014, pg.4). Other products developed by the company include Nintendo branded products supplied by third-party gaming software vendors.
Sales Units
The FY2013 worldwide sales for Nintendo DS series hardware (comprising of Nintendo DS Lite, Nintendo DSi XL, and Nintendo DSi) were 2.4 million units while the FY2013 sales for the Nintendo DS software amounted to 33.4 million units. On the other hand, the FY2013 worldwide sales for the Wii U hardware and Wii U software were 3.5 million units and 13.4 million units respectively in the FY2012 (MarketLine Report, 2014, pg.9). Equally, the company sells different Wii software and hardware units amounted to 50.6 million units and 4 million units respectively. Finally, the worldwide sales for the Nintendo 3DS software and hardware amounted to 49.6 million units and 14 million units respectively.
Description of firm and its management
Corporate Governance
The management at Nintendo is committed to maximizing the corporate value of the company and at the same time, considers the benefits the company offers to everyone. The optimal structure of management enables Nintendo’s directors to undertake their business operations and implement decisions that influence a myriad of factors within the company. Transparency and sound management system are the ingredient that guides corporate governance (Aamoth, 2013, p.5). The company values its employees concerning the policies of the company, particularly areas relating to corporate ethics. The company is governed through a unique software-driven amalgamation of software and hardware.
Management and Key Employees
Nintendo’s management comprises of the Executive Management Committee, Board of Directors, and other executive members responsible for making efficient and prompt decisions relating to the company.
Source: MarketLine Report, 2014, pg. 7.
Auditors
Nintendo has employed five Auditors (2 internal auditors and 3 independent auditors) to scrutinize the company’s financial statements and provide valuable information to the President and to the Board of Directors. The independent auditors have no stakes at Nintendo. To increase the level of effectiveness and efficiency of auditing reports, the auditors engage in constructive discussion with the Internal Auditing Department that is directly supervised by the President.
Internal Control System
The Company implemented the Internal Control System Committee (ICSC) to enable the company to maintain and improve the level of management outcomes. The President chairs the ICSC. The ICSC is responsible for not only auditing Nintendo’s operations in different regions but also ensures that it reviews internal control mechanisms that enable Nintendo to comply with legal regulations in the different operating regions (Nintendo 2014a). Other key responsibilities of the ICSC includes reviewing of risk management initiatives, building consensus through frequent communication, and promoting mutual understanding among Nintendo’s operating divisions.
Nintendo’s competitive environment
Nintendo operates in a highly competitive industry where discretionary spending and leisure time forms the major points of the target. Sony, Electronic Arts, Microsoft, and Apple are some of the major competitors for Nintendo. Most of these competitors develop and publish software used in video console platforms. It also competes with small industry players such as Activision Blizzard, Konami, Take-Two Interactive Software, Taito, and Giant Interactive Group (MarketLine Report, 2014, pg.16). Increased competition leads to increased pricing pressures that in turn affect the level of market and revenue share for Nintendo.
For the past several decades, Nintendo has been a major player in the video game industry. However, maintaining a competitive is not an easy task in a competitive industry like the video game industry (Landsman, & Stremersch, 2011). Nintendo’s major competitors include Microsoft (Xbox) and Sony (PlayStation). However, Apple Inc. proves to be a major competitor to Nintendo because of free games provided on the iPad and iPhone. The analysis of Nintendo’s competitive environment involves the analysis of the competitor’s current strategies, future objectives, weaknesses, and strengths (Peckham, 2014, p. 2). However, future objectives of these competitors are difficult to ascertain because most of these objectives are protected by trade secrets.
Analysis of current strategies used by the competitors is easy because such strategies are capable of being determined through from analyzing their marketing strategies. For instance, Sony implemented a price reduction strategy and discounted products in order to provide cheap products to clients. Sony PlayStation is also built with motion-sensing game controllers that resemble game consoles on the Wii console (Nusca, 2014). The popularity and brand value of the Sony PlayStation is another key strength for Sony. Microsoft lacks popularity in this sector because it is a relatively young entrant and; therefore, it still suffers from challenges associated with the refinement of business processes.
There is no doubt that Nintendo is king of casual games after beating companies such as Microsoft, Sega, and Sony. However, the popularity of iPad and iPhone games such as Angry Birds led to the loss of nearly a Billion dollars for Nintendo. This explains why Nintendo developed a GamePad touchscreen controller like those found in smartphones. Worse still, AirPlay Mirroring that enables Apple customers to transmit their gameplay to full-screen TVs presents another challenge for Nintendo. This presents a bigger challenge for the game console industry. For instance, Wii U fans were required to spend at least $250 to acquire the new console while AirPlay Mirroring is free on iPads, iPhones, and iPod Touches.
Nintendo’s strategy of developing game consoles that are appropriate for non-gamers and families. This increases the company’s ability to inject a competitive advantage in the video game industry. This can be attributed to Nintendo’s resources such as high class manufacturing processes, research and development, competitive marketing team, and a competitive board of management. With these resources, Nintendo has valuable capabilities that enable it to implement changes to that affect the future of the gaming industry. Nintendo’s research and development is critical for ensuring that the company adopts innovative game concepts and technologies necessary for developing high quality products. An efficient and state-of-the-art manufacturing process enables Nintendo to produce more products and expand its economies of scale. A strong marketing team pushes for the popularity of the Nintendo brand. Finally, yet important, the company’s visionary leadership enables it manage its efficient leadership and production processes.
Economic climate and Industry
Transparency Market Research projects that the video game market would be worth between US$117.5 billion by 2015. In the 2011, the global gaming market was worth US $70.5 billion. The emerging number of users that are increasingly taking up gaming as their ideal entertainment tool play a fundamental role in influencing the global gaming market. The age group of most gamers comprises of gamers aged between 5 to 45 years. This means that Nintendo’s software and hardware market are more likely to benefit from the increased number of consumers. The depreciation of the Japanese Yen against the US dollar and Euro led to a decline profits and increased expenses in foreign markets. However, this depreciation of the Japanese yen against major foreign currencies translated into increased exchange gains in Japan.
The increasing video games and competitive strategies adopted by different gaming console companies shows that Nintendo operates in a healthy economy. The Asian Pacific region is becoming increasingly popular with an increasing number of gamers. Advancement in technology and heightened competition among game console companies is an important facet to consumers because they benefit from increased product quality and a wide variety of products.
Revenue Analysis
The FY2013 saw the company registers $7,668.6 million in terms of sales revenue. This represents a decline of 1.9% of revenue compared to revenue recorded in the FY2012 period. Japan provides the largest revenue comprising 32.9% of the total revenue. In terms of revenue by segment, handheld hardware (35.8%) followed by handled software (22.8%), then home console hardware (21.5%), home console software (12.1%) and other segment accounted for 8%. The home console software also recorded a decrease in revenues by 34.3% over FY2012 figures and the handheld hardware division recorded declined revenues by 3.1% compared to FY2012 figures. On the other hand, handheld software product division and the home console hardware division recorded a 13% and an 18% increase in revenue compared to FY2012 figures, respectively.
Other factors
Piracy and unauthorized copying highly influence the competitive nature of most products from the company (Kane, 2014). The breach of security also leads to the disclosure of pre-released software is likely to affect the company.
Evaluation of Financial Statements
Overview
An evaluation of Nintendo’s financial statements indicates that the company is financially sound. However, there is a need for improvement in order to strengthen its liquidity, efficiency, profitability, as well as its solvency (Nintendo, 2014b, p.2). An improvement will place the company at more secured financial position than it is currently. The company has the ability to pay short-term financial obligations, but there is a need for improvement. The capital structure and long-term solvency analysis indicates that Nintendo is very stable and secured because it finances its assets heavily using its equity. Profitability analysis indicates that the company is making profits, but the returns are below the industry average (Nintendo, 2014b, p.2). Market measures indicate that the company is in a good position in the market. In general, the company needs to improve its performance to strengthen its financial position as well as to have an excellent market position.
Short-term liquidity
Short-term liquidity measures a company’s ability to meet the short-term financial obligations. It measures the ability to settle current financial obligations using current assets. Among the measures of short-term liquidity, include current ratio and quick ratio. Current ratio = current Assets/ current Liabilities. Nintendo’s current ratio as of March 31, 2013 was 6.13, and 4.81 as at December 31, 2013 (Nintendo, 2014b, p.5). The current ratio worsened for the nine months to December 2013. This is because of increased current liabilities. The quick ratio also reduced from 2.70 as of March 31, 2013 to 1.91 as at December 31, 2013. This implies a reduction in Nintendo’s ability to meet, or pay short-term financial obligations, or debts using current assets.
Operating efficiency
This ratio indicates a business efficiency in using its assets. These ratios include asset turnover and fixed asset turnover. Asset Turnover = net sales/ average total assets. Nintendo’s assets turnover as of March 31, 2013 was 0.37 and 0.32 as at December 31, 2013. Assets turnover reduced in the nine months that ended December 31, 2013. The fixed assets turnover as of March 31, 2013 was 7.30, and 7.28 as at December 31, 2013. There was a small decline in fixed asset turnover.
Capital structure and long-term solvency
Capital structure of the company considers the proportion of debt to equity financing. A company, which is financed heavily by debt, has more risk of liquidation because of the high leverage. Among the measures of capital structure and long-term solvency is debt-to-equity ratio and financial leverage. Debt to equity ratio measure the amount of debt used in financing the company’s assets. It is calculated as debt-to-equity ratio = total liabilities/ shareholders equity. As at March 31, 2013, Nintendo’s Debt to Equity was 0.17 and 0.24 as at December 31, 2013 ((Nintendo, 2014b, p.5). The ratio worsened because of the reduction in shareholders total equity as well as an increment in total liabilities. However, the ratio indicates that Nintendo’s capital structure and long-term solvency are secured because it finances its assets heavily through its equity. Nintendo is financed heavily through its equity and less through its debt. As of March 31, 2013, Nintendo financed its assets using 80.30 percent of equity and 19.70 percent (Datamonitor, 2014, pg. 6).
Profitability
Profitability ratios measure the company’s ability to create returns on resources employed by the company (Brigham, 2013). It measures the ability to control the company’s operation expenses and to make profits based on available resources. Among the profitability ratios includes Gross profit margin, Net profit, and Return on equity among others. Gross profit margin given as gross profit margin = gross profit/ net revenues. Nintendo’s gross profit margin as of March 31, 2013 was 23.43%, and 29.91 as at December 31, 2013. This indicates an increment in the ability to make returns. Net Profit Margin: measures a company’s efficiency in controlling cost. It is calculated as net profit/ net sales. Calculated profit margins as of March 31, 2013 was 2.68, and 2.04 as at December 31, 2013. This indicates a reduction in Nintendo’s ability to manage operating expenses for the nine months to December 31, 2013. Return on equity is given as net income/ equity. Nintendo’s return on equity as of March 31, 2013 was 1.14 and 0.08 as at December 31, 2013 (Nintendo, 2014b, p.4). There is a reduction in return on equity in the nine months as compared to March 2013 results.
Market Measures
Market ratios are measures that evaluate the financial and economic position of the company in the marketplace. Among the market value, ratios include net income per share, dividend per share, earning per share, and book value per share among other measures (Brigham, 2013). Net income per share measures the returns per share. As of March 31, 2013, the net income per share was 113.75 Yens and 79.73 yens as at December 31, 2013. The dividend per share was 100 yens the year ended March 31, 2013. Earnings per share as of March 31, 2013 was 55.52 Yens, while the book value per share was 101.75. From the evaluation of the market measures and financial statements for the financial period 2013, Nintendo is performing well. There is the need to improve the performance indicators for Nintendo to have an excellent position in the market.
Outlook, Summary, and Conclusion
Outlook for performance, earnings projection
Nintendo pursues a strategy increasing products in the gaming industry through the delivery of compelling products that can be enjoyed by virtually every individual irrespective of gender, age, or the level of gaming experience. During the last financial year, Nintendo released Nintendo 3DS and Pokemon X/Pokemon Y in different operating segments across the globe (Nintendo 2014b, p. 3). These releases accounted for 11.61 million units. First-party titles in the Japanese market and hit titles from third-party publishers have continued to show increased sales. Consolidated financial forecasts show that Nintendo expects to register decreased sales because of increasing general and administrative expenses (Horn, 2014). The stable growth of the Japanese economy means that the exchange value of the Japanese Yen will rise thereby leading to reduced exchange gains and ordinary income (Nintendo 2014b, p. 3).
In terms of competition, the video game industry is faced with intense competition. Nintendo, Sony, Apple, and Microsoft increasingly compete to deliver unique products and introduce innovative technologies to the market. The reaction from one competitor determines Nintendo’s actions. This explains why Nintendo is forced to constantly analyze the current strategies, future objectives, core competencies, and capabilities of its competitors.
Nintendo’s basic investment policy entails the provision of capital that is requisite to fund future growth such as investments in capital, in addition to enabling the company, to maintain a liquid and strong financial position. Such investments are also critical for enabling the company to prepare itself for any possible changes in the market and to cater for intensified competition. The company also distributes direct profits to its shareholders in the form of dividends depending on the amount of profits obtained in each financial period.
Reference List
Aamoth, D 2013, 'The History of Video Game Consoles: Part One', Time.Com, p. 1, Business Source Premier, EBSCOhost, viewed 23 March 2014.
Brigham, E. 2013, Financial Management: Theory & Practice. New York: Cengage Learning.
Datamonitor, 2014. 'Nintendo Co., Ltd. SWOT Analysis' 2014, Nintendo Co., Ltd. SWOT Analysis, pp. 1-8
Horn, L 2014, 'Nintendo Losses Deepen, Wii U Expected by Holidays', PC Magazine, p. 1,
Kane, SF 2014, 'Copyright Assignment Termination after 35 Years: The Video Game Industry Comes of Age', Intellectual Property & Technology Law Journal, 26, 1, pp. 15-19
Landsman, V, & Stremersch, S 2011, 'Multihoming in Two-Sided Markets: An Empirical Inquiry in the Video Game Console Industry', Journal Of Marketing, 75, 6, pp. 39- 54
MarketLine Report, 2014. Company Profile: Nintendo Company Limited. Marketline, p. 1-19
Nintendo, 2014a, IR Information: Business Policy. Available on 23 March 2014 from http://www.nintendo.co.jp/ir/en/management/policy.html
Nintendo, 2014b, Consolidated Financial Highlights for the Nine Months Ended December 2012 and 2013. Nintendo Co Limited
Nusca, A 2014, 'The Next Step in the Evolution of Sony', Fortune, 169, 4, p. 59
Peckham, M 2014, 'Nintendo, Like Apple, Needs to Control the Experience from Nuts to Bolts to Keep Being Nintendo', Time.Com, p. 1, Business Source Premier, EBSCOhost, viewed 23 March 2014.
Appendices
Appendix A
Appendix B
Balance Sheet
Appendix C
President(Representative Director)
Satoru Iwata
Senior ManagingDirectors(Representative Directors)
Genyo TakedaShigeru Miyamoto
Managing Director
Tatsumi Kimishima
Directors
Kaoru TakemuraShigeyuki TakahashiSatoshi YamatoSusumu TanakaShinya TakahashiHirokazu Shinshi
Auditors
Minoru UedaKen Toyoda
Outside Auditors
Naoki MizutaniYoshimi MitamuraKatsuhiro Umeyama
Appendix D
Appendix E
Competitive Landscape
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