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00-Getting-Started/2021-06-06-Financial-Analyis-Crash-Course.md
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IGNITED FINANCIAL ANALYSIS CRASH COURSE - WHAT TO EXPECT FROM Q1 RESULTS
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========================================================================
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| Author | Source |
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| :-------------: |:-------------:|
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| [u/JohnnyGrey](https://www.reddit.com/user/JohnnyGrey/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/ntriid/ignited_financial_analysis_crash_course_what_to/) |
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---
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[DD 👨🔬](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22DD%20%F0%9F%91%A8%E2%80%8D%F0%9F%94%AC%22&restrict_sr=1)
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Hello you beautiful bastards. Since the Q1 results are right around the corner, I thought I could share some of my limited financial analysis knowledge with you. I know your tits are as jacked as your brains are smooth, so bear with me. This will be fun, I promise!
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[](https://preview.redd.it/yie61c2ako371.jpg?width=1289&format=pjpg&auto=webp&s=d6e4b460995a0b1adf7e59a1a5f2f89d83f569f0)
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And on we go...
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Let's start with the Balance Sheet.
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What is a Balance Sheet?
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Just like you take a selfie and post it on your social media, a Balance Sheet is basically a snapshot of a company at a given point in time. It shows the company's Assets, Liabilities and Equity (The relation between these three is : Assets = Liabilities + Equity). In short: What the company owns and what the company owes. Pretty simple right? That's fucking right, we got this!
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[](https://preview.redd.it/0dsflzgmko371.jpg?width=500&format=pjpg&auto=webp&s=367a777a7394eadff953c0c8ef1e3cd4912cb5bc)
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IGNITED BREAKDOWN OF THE BALANCE SHEET
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The Balance Sheet, as I was saying earlier, is split in the company's Assets and Liabilities + Equity. The order each of these appear in any Balance Sheet is usually: Current assets -> Non-Current assets -> Current Liabilities -> Non-Current Liabilities -> Equity. Sometimes the Equity comes before the Current and Non-Current Liabilities. It depends on the FS format.
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Let's see what each of these items consists of, and give a simple description for each component:
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Current assets - these are the most liquid assets that GameStop has. Think of them as the easiest stuff you can sell for cash $$. The current assets in the case of GS are the following:
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- Cash and cash equivalents - money and stuff that can be most easily converted to money
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- Restricted cash - consists primarily of bank deposits that collateralize the Company's obligations to vendors and landlords (guarantees in the form of cash)
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- Receivables, net - Money that is due to GameStop from customers, from sales of goods/services
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- Merchandise inventories - inventories of physical goods (games, consoles, collectibles etc.)
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- Prepaid expenses and other current assets - Pretty straightforward
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- Assets-held-for-sale - The Company's corporate aircraft which was sold in 2020 for $8.6M
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Whenever I look at current assets I am very, very interested in Cash and cash equivalents, Receivables and Inventories. Preferably, a company has little to no inventories, a lot of receivables (with a good DSO - we'll talk about this another time) and a lot of cash. Let's remember "CASH IS KING". If a company has cash, it can meet short term debt obligations or expand/transform/invest. Having money is always a good thing because it gives you the ability to continue growing, to pivot to a different business model or to survive in case of an unforeseen event (such as the COVID 19 pandemic).
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[](https://preview.redd.it/dv55mf61lo371.gif?format=mp4&s=67bfc499aed7e0574a6a3bd753a684ca408b5295)
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CASH IS KING
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Non-Current assets - these are assets that are not so easily converted to cash:
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- Property, plant and equipment (PPT) - the loads of buildings, land and equipment that GameStop has.
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- Operating lease right-of-use assets - all contracts that permit the use of an asset but do not convey ownership rights of the asset. Not sure what more to say about this, as it is not detailed in the GS Financial Statements Notes.
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- Long-term restricted cash - same as the short term restricted cash, except it's corresponding to a period longer than 1 year.
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- Other noncurrent assets - Pretty straightforward, not detailed in the Financial Statement notes.
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The main focus here for GameStop, are the large number of stores worldwide. Pretty big fucking value in the land and buildings GS owns.
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[](https://preview.redd.it/dkzlhlejlo371.png?width=1351&format=png&auto=webp&s=4d552c594da31b77f2d30c831f75251ac29a45b2)
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They're everywhere!
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Current liabilities - this is the debt that GS must pay in the short term (less than 1 year):
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- Accounts payable - money that GS must pay in the near future to suppliers for goods and services
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- Accrued liabilities and other current liabilities - money that must be paid for goods and services corresponding to a specific period + other current liabilities not detailed in the Financials.
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- Current portion of operating lease liabilities - rent that GS must pay for some HQ locations in the short term
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- Short-term debt, including current portion of long-term debt, net - short term loans
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- Borrowings under revolving line of credit - "The Revolver" line of credit from bank
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Big focus on all of these. Debt has been a big decision factor for these hedge funds to short GME (besides their greed and stupidity). From the looks of it, GS appeared to be unable to meet its short term debt repayment due to the COVID 19 pandemic. Based on this, hedgies went all in, and thought that their infinite naked shorts + MSM FUD will make this a very very safe and profitable venture. They were very wrong.
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[](https://preview.redd.it/5ujkunw1no371.jpg?width=730&format=pjpg&auto=webp&s=e641386ab575f08de06428e8ede3c2d921785935)
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Yay!
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Non-Current Liabilities - this is the debt that GS must pay in the long term (period longer than 1 year):
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- Long-term debt, net - These are the 2023 Senior Notes principal amounts. This is the debt that needed to be repaid by GS before they were allowed to start transforming their business or issue dividends.
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- Operating lease liabilities - This is the long term rent that GS must pay for some HQ locations in the long term according to their contracts (these lease contracts are usually signed on longer periods of 5+ years for better prices)
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- Other long-term liabilities - Other long term liabilities not detailed in the Financial Statements
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The main point from the Non-Current Liabilities is the Long term debt. We'll get to the analysis in a second. We still have one more component of the Balance Sheet to discuss.
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[](https://preview.redd.it/5m28qbggno371.png?width=750&format=png&auto=webp&s=fb69ede751eb7f1ff0e6a6acdbdc0f355aa4f6a4)
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So many strings attached for Senior Notes it's not even funny.
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Equity - This is the corporation's owners' residual claim on assets after debts have been paid.
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IGNITED BALANCE SHEET ANALYSIS AND 8 BALL PREDICTION
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Okay you beautiful bastards, you've read so far and I am really proud of you. This shit is not easy to understand on the first read, so I tried to summarize it below in a picture with colors (even though I know you can't read):
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[](https://preview.redd.it/lzj9p4qlno371.jpg?width=1150&format=pjpg&auto=webp&s=17fd4d237b65deec63aab14de91f7e2109a59cf3)
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Pretty colors make me happy!
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Let's get in the middle of it.
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In 2020 and 2021 Gamestop made a couple of god-tier fucking moves, some of them thanks to people like you and me who like the stock:
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- Sold AIRPLANE (Assets held-for-sale) which means more CASH. YAY!
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- Sold 3.5M shares, raising around $551M more CASH. YAY!
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- Repaid 100% of all short term debt. FUCK YEAH!
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- Repaid 100% of long term debt - 2023 Senior Notes principal. OMFG WHAAAAT?
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That's right, you amazing knowledge thirsty apes. They fucking did it. The 2023 Senior notes were basically the chains that were holding GS from fighting back against the hedgies and taking the company in a new direction:
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> *"The indenture governing the 2023 Senior Notes contains restrictions on the ability of us and our restricted subsidiaries to incur, assume or permit to exist additional indebtedness or guaranty obligations; declare or pay dividends or redeem or repurchase capital stock; prepay, redeem or purchase certain subordinated indebtedness; issue certain preferred stock or similar equity securities; make loans and certain investments; sell assets; incur liens; engage in transactions with affiliates; enter into agreements restricting the ability of subsidiaries to pay dividends; and engage in mergers, acquisitions and other business combinations."*
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Now GS is free to go wherever they please (not unlike Mundo). And they have a shitload of cash to do it, and little to no debt:
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[](https://preview.redd.it/p52bexdsno371.jpg?width=1150&format=pjpg&auto=webp&s=f0c2561305bd6b2d3e20eeec2883cf98b1b0f7b1)
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I like money!
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These few moves deal a huge blow to liabilities and a huge boost to assets. And not just any assets, but to current assets.
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As I was saying earlier, current assets are the star of the show in the Balance Sheet du Soleil. CASH IS KING and GS has a lot of cash right now and no debt. This means GameStop now has a very, very good WORKING CAPITAL.
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Working Capital, also known as net working capital (NWC), is the difference between a company's current assets and current liabilities. So if the company has more current assets than current liabilities, then we have a positive net working capital, meaning that the company can cover short term debt. If the net working capital is negative, then the company is unable to pay all short term debt. GameStop should have a huge positive net working capital in Q1, especially since I'm sure Ryan Cohen has made some moves already, and so did you beautiful apes. I know you have been buying from your local GS since January, and I couldn't be more proud of each and every one of ya!
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I think we should be seeing something like this in Q1, but this is just speculation on my part:
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[](https://preview.redd.it/cwyyjx5xno371.jpg?width=1150&format=pjpg&auto=webp&s=57733adc7fa04d9776828ee9270ca89c951c160b)
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I mean, I'm not like an expert, like uhm, this is my opinion and stuff.
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I think Ryan will want to maximize inventory efficiency to compete with Amazon by offering 1-day delivery for all goods. This means a slight decrease in overall inventories on the balance sheet. This, together with the recent support from apes and publicity should boost Receivables quite a lot in Q121. GameStop, although it has a lot of money right now, might want to reduce prepaid expenses and try to maximize their DPO and get as many extended payment terms from their suppliers.
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This quest for inventory efficiency will most likely decrease the PPT part of the non-current assets. Multiple stores in the same area will not be needed anymore if the demand in that region is not sufficient. Sadly, as a result, some shops might be either sold or rented, which will further increase the Cash position or the Operating lease right-of-use assets position. If the locations are not GameStop's property, and are instead leased, then we could see a decrease in short term and long term rent. This is uncertain, since the contrary could be true as well... higher demand in a region or multiple regions would mean more GS stores will open to cover them.
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The Accounts Payable position will most likely increase as well because of all the new changes and investments being made. Perhaps Q1 is still too early to see this increase, but in Q2 and Q3 we should definitely see a rise. Same goes for accrued liabilities and other liabilities.
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[](https://preview.redd.it/3da0iw5roo371.png?width=1600&format=png&auto=webp&s=f6ed81a2f65574671f9eed3a9104458767eb4433)
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Planning to fail means failing to plan. Wait..
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IGNITED INCOME STATEMENT ANALYSIS
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So here it gets a bit tricky. Because we don't have data about net sales in Q1 (or the expenses), we won't be able to predict the numbers. But that doesn't mean we can't go through an Income Statement and understand what each element represents:
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Net Sales - Total sales minus discounts, returns or allowances due to defects of products. Basically, how much the company is selling. The higher the net sales, the more reach the company has and the more income it should be able to generate (at least theoretically).
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Cost of Sales - The cost of sales refers to what the seller has to pay in order to create the product and get it into the hands of a paying customer.
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Selling, general and administrative expenses - Include all everyday operating expenses of running a business that are not included in the production of goods or delivery of services. Typical SG&A items include rent, salaries, advertising and marketing expenses and distribution costs
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Goodwill and asset impairments - Goodwill impairment is an accounting charge that companies record when goodwill's carrying value on financial statements exceeds its fair value. This is a bit complicated and not that important to be honest.
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Gain on sale of assets - A gain on sale of assets arises when an asset is sold for more than its carrying amount.
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Interest expense, net - An interest expense is the cost incurred by an entity for borrowed funds.
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Income tax (benefit) expense - Gotta pay the taxman.
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Net income/loss - The company's profit or loss for the quarter/year
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Reading the Income Statement is pretty straightforward. You start with the total sales of a company and then you start to subtract all types of costs incurred + taxes. If at the end of it, you still have a positive amount, then you just made some profit! Congrats. If the amount is negative then you have a loss. Sad panda :(
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In FY20, GameStop had a net loss of $215.3M, mostly due to the COVID 19 pandemic, but also because its business model was outdated and inefficient. It's really impossible to try to guess what the Q1 Income Statement will look like, so I will not speculate further. The Balance Sheet was a different story, since we had access to trustworthy information regarding sales of shares and debt repayment directly from GameStop.
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When the Q1 Financial Statements hit, I will try to do a full, in-depth analysis and post it here. I am by no means an expert, so please take anything I say here with a grain of salt. I appreciate any feedback you may have, and I can update my post if you want me to add something. All you have to do is comment or DM me. I am more than happy to increase my knowledge, as I am sure there are many apes smarter than me here.
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And remember: OOK OOK.
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[](https://preview.redd.it/4bdggyb8po371.png?width=1920&format=png&auto=webp&s=def5ccd0dcf4fa0ca03147e77c73f5b2bb2616f6)
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Monke see, monke do.
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TL;DR : Gamestop has a shitload of cash and no more short-term and long-term debt. The only material long term debt remains that from rent contracts for offices and shop locations across the US. This debt is also most likely going to decrease because of remote work as well as leasing contract terminations or re-negotiations due to an inventory efficiency update that Ryan must implement in order to be able to successfully compete with Amazon on the gaming goods and merchandise segment. The company has finished the repayment of its 2023 Senior Notes principal, leading to the metaphorical breaking of chains that were holding the company back for so long. With new leadership, a modern approach, a clear plan and a GOD TIER TEAM, as well as a global loyal customer base that likes the stock, not to mention the free publicity the brand got for the last 6 months, GameStop is now going to show these so called "ANALysts" from MSM, what real fundamentals are and just how high the price of GME can go.
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This is not financial advice, so don't act like it is.
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