Financial Statement Analysis For:
Year end January 25, 2015
Nvidia Corp. is publicly traded on the Nasdaq Global Select Market under the ticker symbol NVDA. They adopt U.S. GAAP for their financial reporting. Depreciation and amortization are calculated using the straight-line method, accounts receivable are reported at net, and inventory is assumed to be FIFO (first-in first-out). The consolidated financial statements being analyzed are for the fiscal year that ended January 25, 2015. The financial statements as well as the internal controls both received an unqualified audit opinion from PricewaterhouseCoopers LLP. Nvidia is a ...view middle of the document...
According to Jon Peddie Research (or JPR), in total graphics chips (GPUs) market, Nvidia takes 15% of the total market share, the second in the market, just behind Intel (65%). (Dow, 2015).
However, the slowdown of the traditional PC market and ever intensified competition drive Nvidia and all other companies in the same industry to search for new business opportunities. That is why, more recently, Nvidia has moved into more diversified market such as vehicle navigation and gaming market, where its processors can power next-generation unmanned aerial vehicles and gaming-specific notebooks.
Data used to common size balance sheet and income statement comes from Nvidia Corp. Form 10-K (2015).
TABLE 1. COMMON SIZE BALANCE SHEET
TABLE 2. COMMON SIZE INCOME STATEMENT
a. The company’s major assets based on the common size balance sheet in Table 1 are, cash and marketable securities, goodwill and property and equipment, in that order. Cash and marketable securities cover more than 60% of its total assets.
b. The company’s major source of capital based on the common size balance sheet shown in Table 1 is equity. Shareholder’s equity covers just over 60% of the total assets. Their debt to equity ratio is slightly over 60%, which is in a good shape compared to the industry average. From Table 1, we can see that Nvidia has a big amount of treasury stock that significantly reduced total amount of equity and increase debt-to-equity ratio. As the common stock buyback has reduced the company’s cash holdings and simultaneous shrunk shareholders' equity on the liabilities side by the same amount, the performance metrics such as return on assets (ROA) and return on equity (ROE) is improved subsequent to the buyback, which can be seen from DuPont analysis and ratio analysis in section II and section III. To me, the main reason that Nvidia repurchase its stock is to reduce the number of shares outstanding and increase earnings per share (EPS) thus boost share price, which can be viewed as an another method of returning cash to stockholders.
c. Nvidia is applying relative relaxed working capital policies. As seen in Table 1, the current assets portion is close to 80% as of the total assets. That means there should be minimum risk for the creditors. High level of working capital guarantees the entrepreneur of the smooth functioning of the operating cycle. On the other hand, there is a disadvantage of lower return on investment because higher investment in the current assets attracts higher interest cost which in turn reduces profitability (Borad, 2014). That also partly explains why Nvidia has relatively lower ROA as compared to the industry average.
d. The big change in the percentages of asset line items is the re-allocation between cash and marketable securities. These marketable securities are highly liquid, and generally provide the company a bit of a return on its investment - just enough to keep up with inflation.