Romania was our final training stop on the EA tour of Europe. This is a new country for me. The Romania EA group does a great deal of quality testing and some game development. The headcount runs about 500 in this facility. We did a standard Financial Intelligence class for this group. Upon arrival to Romania we found out we were not too far from the Transylvania area and Dracula’s castle. It made walking the streets at night a bit interesting. I don’t think we came across a vampire in town but one can never be sure.
In this EA class we compare EA margins to a major competitor margin Activision. For Activision’s latest fiscal year their operating margin was 29.9% while EA had an operating profit margin of 3.2%. This fact always gets EA attendees raise their eyebrows. After seeing these margins I ask the class if they should all send their resumes to Activision. When you only look at margins EA looks like they are way behind Activision. On the other hand, when we look at the balance sheet for the two companies we see that EA does $3.8 billion dollars of revenue on $5.1 billion dollars of cash and Activision does $4.9 billion in revenue on $14.2 billion dollars of cash. Activision’s largest asset by far is goodwill which comes in at $7.1 billion which is related to acquisitions. So even though Activision has much higher margins it is not getting near as much revenue relative to its assets as EA. Consequently Activision’s stock price is relatively stagnant.
After the review of the two companies, I asked the group what problem would you rather have? Not enough profit and margin or too little revenue relative to your investments? The class was able to see that in some ways Activision has a tougher challenge than EA.
We learned from this example that when comparing businesses by ratios we need to look at many ratios not just one to get a complete picture. We learn a lot by considering more than one financial statement in our ratio analysis. Sometimes in business we focus too much on the income statement and forget that there is a lot to learn from the balance sheet and the statement of cash flows.