Quick Analysis: Nintendo’s Major Bank Account

Even in bad times, one of Nintendo’s saving graces–one that fans are well aware of, is Nintendo’s large cash reserves. It’s well understood among fans, journalist and investors that Nintendo is a conservative company, but did you ever wonder how much cash Nintendo actually has? Is it true that Nintendo is swimming in a poll of cash akin to Scrooge McDuck? So, let’s investigate and see not only how much cash Nintendo has, but also how their overall liquidity compares to their competitors.

Nintendo’s Cash Reserves

As of March 31, 2016, cash and deposits total 534,706 million yen. This is equivalent to 4.46 billion dollars. This amount represents 39.52 percent of total assets. In other words, about 40 percent of what Nintendo owns is just cash. You might think that Nintendo has a mountain of cash; however, this amount does include other non-cash items and some adjustments need to be made. This amount include CDs with a maturity of more than three years, totaling 335,217 million yen, that is subtracted out, and securities maturing in less than three years, totaling 82,050 million yen, which are added to the cash balance. As a result, cash and cash equivalents total 281,539 million yen, or 2.35 billion dollars. This amount represents 20.81 percent of total assets. But why the adjustments? First, CDs are locked in for a set about of time and there is a penalty for withdrawing them, so they are not immediately available. Conversely, the securities that mature in less than 3 months are investments that Nintendo will have very soon, and there is little consequence for selling them. Think of these as bonds that you can sell quickly. Even after the adjustments, about a fifth of Nintendo’s assets are just cash. Of course, that’s still a lot of cash, even if it’s less than we previously thought.

Liquidity Ratios

from thinkadvisor.com

But just how good is Nintendo’s liquidity really? It may seem strange to say that having spent an entire article discussing Nintendo’s cash reserves, but pure numbers can be misleading. Different industries will have different balance sheet structures. You wouldn’t expect, say, a bank to have the same amount of cash as a steel mill. So, to adequately gauge Nintendo’s liquidity, we need to compare them to their peers. Financial analysts will often use ratios to compare companies within the same industry. Ratios are great because they are quick and can compare companies of different sizes. So we’ll do the same here.

We’ll compare Nintendo against four other large publishers: Electronic Arts, Ubisoft, Activision Blizzard, and Square-Enix. These companies were chosen because they were large publishers who focus primarily on games (unlike Microsoft and Sony). To compare, we’ll use use three ratios: the current ratio, the quick ratio, and the cash ratio. Here are what the ratios tell us:

Current Ratio – This ratio is calculated by dividing current assets (assets which mature within one year) by current liabilities (which are obligations due within a year).

Quick Ratio – This ratio is calculated by dividing current assets minus inventory by current liabilities. The reason inventory is removed is because inventory is less liquid than cash. It can be hard to sell completed goods or raw material.

Cash Ratio – This ratio is calculated by dividing cash and cash equivalents by current liabilities. This ratio is the most conservative as it only considers cash as a source of liquidity.

With all these ratios, it’s best to be above 1. The number means how many times liquidity covers current liabilities. So a 2 is the same as saying liquidity is twice current liabilities. Naturally, higher is better. Also, we’ve mostly focused on cash thus far, but liquidity is not just regulated to cash and cash equivalents. Assets like stocks and bonds are also liquid because you can easily sell them for cash.

** Ratios for non-US companies was obtained from Market Watch. Ratios for US companies was calculated from data provided by Yahoo Finance.

As you can see from above, Nintendo’s ratios are far and beyond greater than others in the video game industry. Nintendo’s subperb liquidity ratios are due to their cash reserves. You can see this in the cash ratio.  Again, the cash ratio is simply cash divided by current liabilities. Most of the companies here have a significant drop from the quick ratio and the cash ratio, implying a greater portion of their current assets are made up of less liquid assets. For comparison, Nintendo’s cash ratio is 7 percent less than the quick ratio, yet Activision Blizzard’s ratio declined by 22 percent less. Ever other company has a cash ratio less than one, which means their cash isn’t enough to cover short-term liabilities. Nintendo, however, knocks it out of the park with a ratio of 9.24.

The reason the cash ratio is important is because not all current assets are equal. Current assets are the most liquid assets a company can have, yet converting them to cash is easier said than done. Inventory is far less liquid than say securities or accounts receivable. Companies can run into issues selling their inventor (such as raw materials or unfinished products) such as selling them for less than they are worth, or even being able to sell them at all. Cash is king; you can rely on it to meet your obligations. It’s clear from the ratios above the Nintendo has plenty of it.

Closing

So it’s true; Nintendo does have a major bank account. Many people always look to Nintendo’s earnings or their sales numbers to say the company is doomed. Of course, companies will always want strong earnings and sales, but we can safely say Nintendo will be able to keep going and making games for a long while.