Ratios to Evaluate a Company Nike Inc Finance Essay

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NIKE, Inc, incorporated in 1968, is engaged in the design, development and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. NIKE is a seller of athletic footwear and athletic apparel worldwide. In the seventies, in the meantime, the company was undergoing a redesign of the production system, expanding internationally and especially in Australia, under licensing agreements, Korea and Taiwan. 1978 was the year of the official birth of Nike Inc., but also the first sponsorship contract signed with a major sports personality, tennis player John McEnroe. In 1979, Nike covered a great slice of the U.S. market, 50% in the field of running shoes, and had a turnover of approximately $150 million. The company, which employs just over 2,700 people, was listed in the following year, with two million ordinary shares as an offering to the public. The current economic climate is undoubtedly happy, as evidenced by the $250 million in revenues. In June 2011, “at an investor meeting at its world headquarters…NIKE, Inc. announced an increase to its fiscal 2015 revenue target to a new range of $28-30 billion, up from its previous target of $27 billion announced in May 2010. The company also increased its fiscal 2015 revenue target for the NIKE Brand to $24-25 billion, up from its previous target of $23 billion.” (https://nikeinc.com/pages/history-heritage) Financial Performance from 2008 to 2011 A high volatility and disruption in global and credit markets, due to financial crisis started in 2008, have led to a tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in the United States and internationally. It is obvious that the following factors had negative effects on Nike’s financial performance also in 2009. This in fact reflected in a decrease in product demand and reduced orders, which led to lower revenues, an increase in revenues and lower profit margins. Nike generated $19.2 billion, but its earnings per share declined 19% for the year. The negative effects of the recession continued to show up in the slight decrease in Nike’s revenues in 2010, which corresponded to $19 billion. However, earnings per share and futures orders went up, while inventories shrank. In 2011 it can be seen how Nike’s financial performances started to recover from the crisis. It’s revenue for the year was $20.9 billion and also earnings per share grew 14%, coming in at $4.39. This revenue increase was mainly due to higher contribution from the Nike brand and the company’s other businesses. The operating profit of the company was $2.8 million and the net profit was $2.1 million in 2011, an increase respectively of 13.8% and of 11.9% from the previous year. Evaluating Ratios Leveraging 2008 2009 2010 2011 Debt RatioA¢â‚¬A¨ 0,37 0,34 0,32 0,34 Debt/Equity RatioA¢â‚¬A¨ 0,59 0,52 0,48 0,52 Debt ratio indicates the leveraging of a company related with the risk that the company faces if it relies too much on the debt. In the case of Nike, from 2008 to 2011 it can be seen how this ratios remained almost unchanged also during the recovery period, meaning that the company also when facing a slight decrease in 2010, did not decide to use more debt to finance its operations. In addition, debt to equity ratios indicates how much of equity and debt the company used to finance its growth. Nike has a quite low and constant debt to equity ratio throughout all four years, indicating that the company has a lower risk, meaning that debt holders cannot claim on the company’s assets and the company hasn’t been aggressive in financing growth with debt. Efficiency 2008 2009 2010 2011 Stock (Inventory) turnoverA¢â‚¬A¨ 4,49 4,41 4,64 4,77 Debtors turnover (accounts receivables)A¢â‚¬A¨ 7,04 6,75 6,87 7,21 Creditors turnover (Account payables) 41,49 40,04 40,85 43,78 Sales/Assets 1,50 1,45 1,32 1,39 A consistent value in Nike’s net profit margin can be observed throughout the past four years, with a slight decrease in year 2009 where it was strictly correlated to the effects of the financial crisis. This ratio indicates the company’s ability to generate constantly high levels of profit. However, Nike faces some problems when it gets to collecting money from its debtors. In fact both stock and debtors turnover are quite low, but still in the average of the industry, meaning that the business needs to improve its credit policies and collection procedures. On the contrary, creditors turnover is consistently high throughout all four years. However, because this number is constant it is possible that it is not due to the company paying back it’s creditors after many days, but it can be a financial choice of the company. In fact, the company does not present any liquidity problems or delays in paying back its debt. Profitability/ Investment 2008 2009 2010 2011 Net Profit MarginA¢â‚¬A¨ 10,11 7,75 10,03 10,22 Return on Asset (ROA)A¢â‚¬A¨ 16,28 11,57 13,78 14,5 Return on Equity (ROE)A¢â‚¬A¨ 25,36 18 20,67 21,77 Return on Invested Capital (ROIC) 22,81 16,56 19,27 20,46 Payout RatioA¢â‚¬A¨ 33,5 32,3 29,7 27,3 Return on assets shows the rate of return being earned on all of the firm’s assets regardless of debt and equity. It is a measure of how efficiently the company is using all stakeholders’ assets to earn returns. Because this ratio can differ significantly across firms, it is often used to compare a company over time or against companies that have similar financing structures. Nike shows a quite good return on assets ratio, even though it has experienced a decrease from 2008 to 2009, but however it started to increase again and it is expected to grow in the future years, due to the very high revenues of the company in recent years. Another fundamental ratio for measuring the profitability of a company is return on equity. This provides a measure of the return that the firm has earned on its past investments. It demonstrates a company’s ability to generate profits from shareholders’ equity. A high return on equity may indicate the firm is able to find investment opportunities that are very profitable. This is the case of Nike that demonstrates a consistently high return on equity making it a very attractive and profitable investment option for its stockholders. Liquidity 2008 2009 2010 2011 Current RatioA¢â‚¬A¨ 2,66 2,97 3,26 2,85 Quick RatioA¢â‚¬A¨ 3,32 3,85 4,05 3,65 The current ratio compares the liquid assets of a company with the current liabilities. Nike’s current and quick ratios are very high, meaning that the company is very liquid and it is able to meet short-term financial obligations. Nike growth is mainly attributed to investment activities such as Nike Golf, Converse, and Hurley. However, cash flow has decrease from 2010 to 2011 even though the company’s earnings are continuing to grow. Market Valuation 2008 2009 2010 2011 Earnings per Share 1,87 1,52 1,93 2,2 Dividends 0,44 0,49 0,53 0,6 Shares 1,008 981 988 971 Book Value per Share 7,94 8,97 10,74 11,63 Share Prices 31,71 26,93 34,76 41,15 P/E Ratio 16,69 17,72 18,01 18,70 Price to earnings ratio is a very good guide to market confidence concerning the future of a company, and it can be very helpful when comparing it to other businesses. High price to earning ratio is not only proof of its profitability, but also shows the extensive confidence the shareholders put into this company, expecting higher returns.A  This, in turn, will raise the demand for investors to gain more equity within the business, pushing the share price further up.A  Nike’s earnings per share had continually increased; demonstrating Nike’s capability to generate higher levels of earnings, utilizing less equity than would have been used otherwise.A  Due to higher liquidity, net profit margins and increasing retained earnings, Nike is capable of paying out dividends at a significantly higher rate than their competitors.A Conclusion To sum up, during the first two quarters of 2012, Nike bet expectations both with earnings per share and with revenues. The company’s earnings per share were equivalent to $1.23, 0.10 more than expected, and revenues of $6.67 billion, versus the $6.51 billion expected. Revenues, compared to the same quarter in 2011, increased 9.7%. The company’s liquidity remains very good and Nike has been rated A-1. Moreover, the company’s short-term debt obligations are at minimum, meaning that the company plans to pay back its debt shortly with excess cash on the balance sheet. Nike is not only performing well financially, but has the biggest competitive advantage towards its competitors, which is the unequaled brand power that makes the company the leading in its segment.

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