GameStop’s As-Reported Financials Distort The Firm’s Economic Reality
Summary
- GME’s 2015 Adjusted Return on Assets is twice the cost of capital at 13%, higher than the traditional 9% ROA reported by most financial databases.
- One culprit behind this major distortion is the GAAP accounting for GME’s $2.0bn goodwill, which leads to a significant distortion of the firm’s economic reality.
- In addition, GME’s Adjusted Cash from Operations is $980mn versus the firm’s as-reported cash flow from operations of only $632mn.
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Under GAAP, the as-reported financial statements and financial ratios of GME do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics are driven by the inclusion of goodwill ($2.0bn) which inflates the company’s assets, and the incorrect expensing of operating leases ($304mn) which deflates the company’s earnings.
After adjusting for these issues and a host of other GAAP-based miscategorizations, Valens calculates GME’s Adjusted Return on Assets as 13% in 2015. In contrast, most financial databases show a traditional ROA of only 9%. The profitability of GME’s operations is therefore not what traditional metrics suggest.
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