THQ In Trouble: A Financial Analysis

As someone who follows both the stock market and gaming industry religiously, today’s news about THQ hit me on practically every front. For those unaware, THQ closed down 1.52 points today and 50.33%, a significant drop for the company that could spell doom. As many see stocks as gobbledygook, in this article, we’ll be taking a look at the metrics, news and prices for THQ and explaining exactly what it all means.

First let’s talk about points. A point is equivalent to a dollar, meaning that when you hear a stock is down “five points”, it really means it’s down $5. Thus, after closing at $3.02 yesterday, THQ’s stock fell $1.52 today with its current price sitting at $1.50 — $0.02 below the day’s full drop. A 50% drop in the trading price for a stock is rare and usually is the result of devastating financial information or some other indication that some sort of collapse has taken place inside the company. When a company has such a high drop with such a low asking price, it’s even more dangerous.

Right now, THQ has 6.9 million shares outstanding, meaning that there are 6.9 million shares on the public market (where you or anyone could buy into) excluding shares that have been repurchased by the company. By multiplying the number of outstanding shares by the current share price, we can find the Market Capitalization — what the company is worth on the stock market. This number is a good representation of the company’s total worth and is commonly used for basic evaluations. THQ has a market cap of 10.3 million dollars. This places them as a “Nano-cap”, or any company with a cap under $50 million, the smallest possible category to be included in. For comparison, a large-cap is over $5 billion. Not only is THQ now a nano-cap company, but even on the lowest spectrum of that. Many investors will recommend steering clear of nano-cap companies (especially ones that arrived there at a decline), as they have a low enough capital that they could simply fold at anytime.

Next, we’ll take a look at “Earnings Per Share”, also known as “EPS”. The EPS of a company is how much its earning per share of stock. We can find this out by dividing the total earnings by the shares outstanding. While THQ was bringing in $831 million dollars of revenue in March, well before the company’s recent woes, they had an operating expense of $1.073 billion, putting them in the red. We can assume that these numbers are far worse now. By doing the math, it’s found that THQ has an EPS of negative $27.85. This means that for every share THQ has ($1.50), they are losing $27.85. At the most basic of analysis, this means that a $1.50 buys you negative $27.85 of THQ money.  When investing in a company, you always want the highest earnings per share possible. Not only do you want it to be positive, but a decent percentage of the company’s trading price. When we look at the EPS growth, we want to see that it’s been increasing quarterly, but see here that it’s actually droped -31.22%.

“P/E Ratio” is the “Price Per Earnings Ratio”, which tells us how much more a share is trading at than what it represents in a company’s earnings. The lower the better, but unfortunately, as THQ has negative earnings, the number is not applicable. The “Dividend Yield” is what percentage the company pays out vs. the current stock price. A “Dividend” is a percentage of a companies earnings that is returned to shareholders to let them share in the company’s success and encourage future investing and long-term holdings. It’s always a positive sign when a company pays a dividend, no matter how small, so it should come as no surprise that THQ is not paying one.

Next, we’ll take a look at some deeper, but perhaps even more telling, metrics of the stock. “Book Value Per Share” represents the company’s worth vs the price of stock. By taking the company’s assets (which includes buildings, properties, cash on hand and even office furniture) and subtracting their liabilities (debt, employee contracts, etc), we get a -$3.04 book value. Not only do you want this number at least be positive, but ideally as close to the current trading price as possible. Among other things, having a negative book value means that THQ, if liquidated, would be worth less than the current amount of debt.

Finally, we’ll go over Return of Equity, which is the rate of return to shareholders. It represents how much money is being made off of the stock purchased by shareholders. We always want this number to be positive, as it means the company is making smart investments with their capital. Unfortunately, we find a devastatingly low -248.80%, meaning that the company is indeed losing money on shareholder’s equity.

To show how far THQ has dropped, we see that it was at a 52 week high on November 11th at $25.099 — just a little under one year ago. Unfortunately, not only has the stock price plummeted, but the $1.50 price comes after a rare 1-10 reverse stock split in July. This was done when the stock was sitting at $0.58 share and facing a possible delisting from the NASDAQ, turning every ten shares of THQ stock into one share worth ten times as much. Doing this made the market cap much smaller and made every point drop more significant. The fact that the stock is sitting at $1.50 a share after being worth $0.58 for ten times as many shares a few months ago is quite worrisome.

Now that we’ve gone through the most important metrics of stock investing, hopefully it’s easier to grasp what all the THQ stock news has meant. As you can clearly see, there’s hardly a single positive stock metric for the company. While we can’t predict the future of THQ, today’s 50% drop is going to be hard to recover from. If the stock goes below $1.00 again for ten conesctuvie days, THQ could face being delisted from the NASDAQ. We’re not sure if another reverse stock split would be possible — and even so, it would make the company’s value incredibly tiny. Based completely on the data above, it’s hard to see a reason why THQ would be a tempting investment for traders at this point, making us wonder what possible conclusions the company could face.

  • Myndale

    Good article. In response to your speculation about whether or not another reverse split is possible, it isn’t. Or rather, it won’t prevent a de-list. THQI are on the Global Select Tier and if you Google “nasdaq continued listing guide” you’ll find there are 3 ways to meet the requirements. Two of those require a market cap of $15M, THQI dropped below that yesterday and are currently sitting at $8M. The other one sets it at $5M but also requires stockholder equity to be at least $10M, and as you point out their liabilities outstrip their assets.

    Barring some kind of miracle THQ will get another delist warning from NASDAQ in 28 trading days from now at which point they have 180 trading days to meet the minimum requirements. At the end of that period they can appeal for an extension but there’s no guarantee they would be granted one, especially given what’s happened over the past 48 hours. Either way, their 10:1 reverse split was a one-off lifeline, they don’t have that option any more.