Nintendo and Sony Companies Financial Fundamentals

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The companys 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 Nintendos position in contrast to Sonys 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 Nintendos 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 companys future financial health. Harvard Business School Review, 91(11), 1-17.

Sony. (2015). SEC Report 2015.

Appendix A

Analysis of the Fundamentals

Instructions

    1. 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:
Criterion Nintendo Sony
Business overall Electronics and entertainment Electronics and entertainment
Products & services Software, games, consoles for gaming, gadgets Audio and video products, mobile communication, games, consoles, financial services
Customers Young persons, families Young persons, families, businessmen
Goals The goal is to provide the customer-oriented services in the sphere of entertainment. The goal is to provide customers with the most innovative products and services to help them address their needs.
Strategies Broad differentiation Broad differentiation
Market Positions The leader in providing consoles and gaming platforms The leader in selling audio, video, and mobile products
General risk factors Financial crisis and changes in the purchasing power Financial crisis and changes in the purchasing power
Quantitative and qualitative mark risk factors The decrease in the customers demand for the proposed products The entry of new competitors using the latest technologies
Competitors Microsoft, Sony Nokia, Samsung, LG
Competitive technology Highly sensitive sensors, mobility Use of latest technologies, reference to multiple users
Regulatory considerations Tax considerations, use of foreign resources Tax considerations, use of foreign resources
Operating characteristics For consoles: Wii
IBM Broadway 729 MHz
ATI Hollywood
For consoles: PlayStation 4
8-Core 1.6 GHz
AMD Radeon
    1. 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.

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