Details
Table of Contents

- Project Overview & Goals -​​

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- Methodology & Approach -

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- Key Activities & Execution -

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- Deliverables & Outcomes -

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- Tools & Technologies Used -

Project Overview & Goals

​Project Overview

This project, undertaken for a Sierra College financial accounting course and documented on May 5, 2020, involved a comprehensive financial analysis of Nvidia Corporation to determine its viability as an investment. Nvidia, known primarily for its Graphics Processing Units (GPUs) used in gaming and professional markets, as well as chips for mobile computing and automotive industries, was selected for analysis.

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​Project Goals

The analysis focused on the fiscal year ending January 26, 2020. The primary goals documented were:

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1) To conduct a detailed financial ratio analysis covering Nvidia's profitability, solvency, liquidity, and market prospects.

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2) To perform horizontal and vertical analyses on Nvidia's balance sheet and income statement, respectively, to understand financial trends.

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3) To compare Nvidia's financial performance against a key competitor, Advanced Micro Devices (AMD), using the same analytical methods.

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4) Based on these analyses, to formulate an investment recommendation regarding Nvidia stock. Personal experience with Nvidia's products was noted but the investment decision was based on the financial analysis presented.

Methodology & Approach

The analysis employed standard financial statement analysis techniques as documented in the project report and supporting spreadsheets. The core methodologies included:​

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Ratio Analysis​

Several key financial ratios were calculated and interpreted across four categories:

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• Profitability: calculated to assess earning power: 

  • Profit margin 

    • (Net Income / Net Sales)

  • Rate of Return on Total Assets

    •  (Net Income + Interest Expense / Average Total Assets)

  • Gross Profit Percentage 

    • (Gross Profit / Net Sales) 

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• Solvency: evaluates the company’s ability to meet long-term obligations and its leverage: 

  • Debt Ratio

    •  (Total Liabilities / Total Assets) 

  • Debt-to-Equity Ratio 

    • (Total Liabilities / Total Equity) 

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• Liquidity: calculated to assess the ability to meet short-term obligations: 

  • Inventory Turnover 

    • (Cost of Goods Sold / Average Inventory)

  • Day’s Sales in Inventory 

    • (365 / Inventory Turnover)

  • Working Capital 

    • (Current Assets - Current Liabilities)

  • Current Ratio 

    • (Current Assets / Current Liabilities)

  • Cash Ratio

    • (Cash + Cash Equivalents / Total Current Liabilities) 

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• Market Prospects: calculated to gauge market perception and returns to shareholders: 

  • Price/Earnings (P/E) Ratio

    •  (Market Price per Share / Earnings per Share) 

  • Dividend Yield 

    • (Annual Cash Dividends per Share / Market Price per Share)

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Horizontal Analysis

A horizontal analysis was performed on Nvidia's and AMD's balance sheets for the fiscal years ending in 2020 and 2019. This involved calculating the dollar amount and percentage change for each line item year-over-year to identify significant shifts in asset, liability, and equity accounts.

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Vertical Analysis

A vertical analysis (common-size statement) was performed on Nvidia's and AMD's income statements for the fiscal years ending 2020, 2019, and 2018. Each line item was expressed as a percentage of Net Sales to understand the composition of revenues and expenses and identify trends over the three-year period.

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​Comparative Analysis

Nvidia's calculated ratios and analysis results were systematically compared against those calculated for AMD to provide industry context and relative performance assessment.

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Qualitative Review

The analysis incorporated a review of information disclosed by Nvidia regarding its business operations, accounting policies (inventory costing using adjusted standard basis approximated by average or FIFO, depreciation using straight-line), legal contingencies (including class action lawsuits related to cryptocurrency impacts on GPU demand), and independent audit results (from PricewaterhouseCoopers LLP for the period ending Jan 26, 2020). Cash flow statement activities were also categorized to assess the company's operational stage. Potential risks, including the emerging COVID-19 impact and a pending merger with Mellanox Technologies, were noted as documented by the company.

Key Activities & Execution

The execution involved gathering the necessary financial data for Nvidia and AMD for the specified fiscal periods. Data tabulation including financial data for assets, liabilities, equity, revenues, and expenses for Nvidia and AMD were organized into spreadsheets for analysis.​

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Ratio Calculations

• Specific ratios were computed using the formulas outlined in the methodology section based on the tabulated data. 

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• • ​​For Nvidia (FYE 2020):

    • Profit Margin -  26% 

    • Return on Assets - 19%

    • Gross Profit - 62%

    • Debt Ratio - 30%

    • Debt-to-Equity - 0.42 

    • Inventory Turnover - 3.25x 

    • Days Sales in Inventory - 112.31 

    • Working Capital -  $11.9B 

    • Current Ratio - 7.67 

    • Cash Ratio - 6.11 

    • P/E Ratio - 54.54

    • Dividend Yield - 0.25%

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• • For AMD (FYE 2020): 

    • Debt Ratio - 53%

    • Return on Assets - 8% 

    • Gross Profit - 43% 

    • Inventory Turnover - 4.23x 

    • Current Ratio - 1.95 

    • Cash Ratio - 0.62 

    • P/E Ratio - 147.07

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Horizontal Analysis Execution

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• YoY Changes Calculated for NVIDIA's Balance Sheet:

  • ​Cash up 1293.4%

    • Primarily due to selling marketable securities.

  • Inventories down 37.8%

  • Total Assets up 30.3%

  • Total Current Liabilities up 34.2% 

  • Other Long-Term Liabilities up 111.1% 
     

• YoY Changes Calculated for AMD's Balance Sheet:

  • Cash up 36.0%

  • Accounts Receivable up 50.5%

  • Long-Term Debt down 56.4%

  • Total Liabilities down 2.7%

  • Shareholder's Equity up 123.3%

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Vertical Analysis Execution

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• NVIDIA Income Statement Items as Percentage of Net Sales

  • ​2020 Cost of Revenue 38%

  • Gross Profit 62%

  • R&D 26%

  • Total Operating Expenses 36%

  • Net Income 26% 

  • Trends noted included rising R&D expenses 

    • From 18% in 2018 to 26% in 2020 and declining cost of revenue. 

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• AMD Income Statement Items as Percentage of Net Sales

  • 2020 Cost of Revenue 57%

  • Gross Profit 43%

  • R&D 23%

  • Total Operating Expenses 33%

  • Net Income 5%

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Comparative Interpretation

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• Nvidia's higher profitability (Gross Profit 62% vs AMD's 43%), stronger asset utilization (ROA 19% vs AMD's 8%), lower debt ratio (30% vs AMD's 53%) were highlighted. 

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• Differences in inventory turnover (Nvidia 3.25x vs AMD 4.23x) were deemed normal for the industry.

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•  Nvidia's significantly higher current (7.67 vs 1.95) and cash ratios (6.11 vs 0.62) were attributed to its recent liquidation of marketable securities. 

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• The P/E ratio difference (Nvidia 54.54 vs AMD 147.07) was noted as open to interpretation regarding market expectations versus potential overvaluation. 

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• Differences in balance sheet focus (Nvidia's cash increase vs AMD's Accounts Receivable focus) and income statement focus (Nvidia's higher R&D spending) were identified.

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Report Compilation

Findings from all analyses were synthesized into a structured report, including company background, rationale for selection, detailed ratio analysis, horizontal/vertical analysis discussion, review of accounting policies/audit/contingencies, comparison with AMD, and a concluding investment recommendation.​

Deliverables & Outcomes:

The project produced several documented deliverables:

Horizontal Analysis Spreadsheet - NVIDIA
A table showing Nvidia's balance sheet figures for 2020 and 2019, with calculated dollar and percentage changes.

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Vertical Analysis Spreadsheet - NVIDIA

A table showing Nvidia's income statement figures for 2020, 2019, and 2018, with line items expressed as a percentage of net sales.
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Horizontal Analysis Spreadsheet - AMD

A table showing AMD's balance sheet figures for 2020 and 2019, with calculated dollar and percentage changes.

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Vertical Analysis Spreadsheet - AMD
A table showing AMD's income statement figures for 2020, 2019, and 2018, with line items expressed as a percentage of net sales.

Ratio Analysis Project Report:

A comprehensive written report detailing the analysis process, findings, interpretations, company background information, competitor comparison, and final investment recommendation.

Assessment of NVIDIA's Financial Health​ 

Nvidia was determined to be profitable, efficient in asset use (relative to AMD), reasonably leveraged, and highly liquid as of the fiscal year ended January 26, 2020. Increases in R&D spending were noted as impacting recent net income but were potentially positive for future growth. The high cash position from selling securities was identified as needing effective deployment. Market value growth from Jan 2019 ($159.43) to Jan 2020 ($250.33) was noted.

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Comparative Assessment

Nvidia generally compared favorably to AMD based on the analyzed metrics, particularly in profitability and debt levels, despite AMD showing higher inventory turnover. Nvidia was characterized as a "cash cow/profitable type company" based on cash flow patterns (positive operating, positive investing, negative financing), while AMD was seen as "profitable and growing" (positive operating, negative investing, positive financing).

Investment Recommendation
Based solely on the financial analysis conducted and documented in the report, the conclusion was to invest in Nvidia. This recommendation cited Nvidia's profitability, self-investment (R&D), dividend payments, market value growth, and favorable comparison to AMD as supporting factors. Acknowledged risks included potential COVID-19 impacts and the (at the time) pending Mellanox merger.

Tools & Technologies Used

Spreadsheet Software

Utilized for calculations in horizontal and vertical analysis tables and ratio calculations.​

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​Yahoo Finance
The source for obtaining market stock price information for NVIDIA and AMD.

Document Processing Software
Google Docs and Microsoft Word were used to build the final report.