The Financial Comparisons between Two Companies Finance Essay

Abstract

The analysis has been done using secondary data. The secondary data is available through the company's main home website where the annual financial reports of the company are available of 2006-2010 financial years for Nike Inc. For Adidas the analysis is done only by using the data from the financial years 2006 - 2009 as the annual report for the year 2010 is not published by the home website of the company yet. The method which is applied to find out the financial comparisons between the two companies is the efficiency ratio analysis which will help us to show how the firm's resources are being used and can be held as a strong measure on the firm's financial performance. Another method is the profitability ratio as we know that the profit is the main key to find out the financial performance of the company hence the GPM and the net profit margins of the companies are calculated by using the formulae. Each analysis has been supported with the help of a graph which shows the trend of the companies to arrive at the final conclusion.

Introduction:

The main aim of my commentary is to investigate the financial performance of Adidas and Nike Inc which are two rival companies. Adidas and Nike Inc are the only companies which dominate the footwear, sportswear and sports equipment sector of the market. For testing the financial strength of the companies, I have tried to use the revenue and profit ratios. In the era of globalization, to attract the investors, the financial data of the two competitors is available on the net. A broad comparison is drawn between the two companies based on sales turnover and other relevant ratios to get an understanding of the financial structure and its effectiveness in the business. Both the companies have strived hard to keep the image of their companies high with the help of these reports to attract more people to invest in their company and to buy more shares. The companies can be compared by the revenues they earned over those financial years, the sales of the company, the sales turnovers of the company, using the various tests and to comment on the performance of the company overall. 

Normally, people look at the balance sheet and the profit and loss account to know the success of the company and to decide whether they want to invest in a company or not. But, it is worth noting that ratio analysis give a better picture of the trend of the company over the years, it pin points the exact highs and lows for the company and comparing the same on an industry level it can be observed whether the industry as a whole is facing crisis or it is the company's inability to generate profits. In the essay I have used historical comparisons which involve comparing same ratio for Adidas and Nike Inc. By using historical ratios the comparisons over the years show a trend which will help us to assess the financial performance of both the companies. This will help us conclude which company has done well financially better than its counterpart. So I have done the comparisons by using the profitability ratio as the profit is a key objective for most of the businesses and can act as a strong measure of a business's success. The efficiency ratio is also used in finding out the financial performance of these companies. Efficiency ratios show us how well a firm's financial resources are being used in which the stock turnover and the return on capital employed are calculated from the financial reports of both the companies.

Main Findings: 

For Nike Inc

2006 - 2007 these financial years specifically showed consistency in their performance without making heavy losses which is the primary aim of all the companies. 2008 was a good year for the company as here the company showed good signs of improvements and performed better than the years 2006, 2007 and 2009 in all cases 2010 was the best year so far as the company has made improvements and has earned the maximum in this year. It is seen that the company after having a drastic fall in the year 2009, the company has bounced back from drought in almost every case and have performed better than the previous year's which is a very good thing for the company. In 2010 the company has the best performance. 2009 the company Nike Inc had handled very well due to the recession the companies had been affected in a huge way like a huge decline in their work but in the case of Nike Inc there wasn't much problem for them if compared to others

For Adidas

2006 - 2007 these financial years showed consistency in the performance of the company In the year 2008 the company had the best financial performance and had performed very well 2009 has been a very bad year in case of financial performance for Adidas as the company has had a major decline in their financial performance which is an alarming state for the company. The year 2009 was a very bad year as the world was hit by a major recession and had created a major slump in the case of many businesses. Adidas was hit by this recession and it was affected in a major way as they incurred heavy declines in their financial performances. https://shoesobsessions.files.wordpress.com/2008/08/ad-2-copia.jpg NIKE INC

Profitability Ratios for Nike Inc. Gross Profit Margin ('GPM')

Profit would be the main aim for many businesses and can help act as one of the methods to measure of the firm's financial success and performance. The GPM ratio portrays the value of gross profit as a percentage of the sales revenue. The GP M ratio is expressed as percentage with the help of the formula. GPM=

• Year 2006. Sales Revenue of Nike Inc - $14,954.9
  • The Gross Profit was - $6580.16
  • Gross Profit Margin - 44%
• Year 2007. Sales Revenue of Nike Inc - $16,325.9
  • The Gross Profit was - $7167.07
  • Gross Profit Margin - 43.9%
• Year 2008. Sales Revenue of Nike Inc - $18627.0
  • The Gross Profit was - $8382.15
  • Gross Profit Margin - 45%
• Year 2009. ales Revenue of Nike Inc - $19167.1
  • The Gross Profit was - $8606.03
  • Gross Profit Margin - 44.9%
• Year 2010. Sales Revenue of Nike Inc - $19014.0
  • The Gross Profit was - $8803.48
  • Gross Profit Margin -  46.3%
• Graph of the GPM from 2006-2010

Analysis: 

The trend in the above graph shows the variation of the GPM of the company over 5 years GPM can be increased by using two main strategies financial and non financial In 2006 - 2007 the company had a comparatively low GPM But in the year 2008 the company improved their performance to a higher percentage as is evident from the graph In 2009 the company did have a small fall of 0.10% in their GPM but then they recovered in the year 2010 with a sudden rise in their Gross Profit The increase in gross profit over the years could be mainly because of two methods Nike Inc could have increased the price of inelastic products to earn more profit (inelastic products are such products whose demand does not go down due to rise in its price) Example: - The Nike Inc could have increased the price of their studs, which are very popular and unique; the demand of those products would not go down. However, considering the globalization, these strategies have become very subjective. Or the company could have reduced the price of elastic products and increase its turnover by luring the common man with its brand name. (Elastic products are such products whose demand rises and falls with a rise and fall in its price. Normally such products have substitutes in the market) Example: - If the company reduce their cost of shoes by 5%, its turnover may increase beyond the loss due to reduction in the price.

Net Profit Margins (NPM)

The Net Profit Margin Ratio is a better measure of a firm's profitability since it accounts for the company's sales and expenses. The more the NPM the better for the company as the company would have more profit to distribute to shareholders and to reinvest in the business. The NPM is generally high for high volume products. We can calculate the NPM using the following formula. Net Profit Margin =

• Year 2006. Sales Revenue of Nike Inc - $14,954.9
  • The Net Profit was - $1392.0
  • Net Profit Margin - 9.31%
• Year 2007. Sales Revenue of Nike Inc - $16,325.9
  • The Net Profit was - $1491.5
  • Net Profit Margin - 9.14%
• Year 2008. Sales Revenue of Nike Inc - $18627.0
  • The Net Profit was - $1883.4
  • Net Profit Margin - 10.11%
• Year 2009. Sales Revenue of Nike Inc - $19176.1
  • The Net Profit was - $1486.7
  • Net Profit Margin - 7.75%
• Year 2010. Sales Revenue of Nike Inc - $19014.0
  • The Net Profit was - $1906.7
  • Net Profit Margin - 10.03%
• Graph of the NPM from 2006-2010

Analysis:

The trend in the above graph shows the NPM of the company Nike Inc over 5 years The following trend line shows the NPM for Nike Inc in 2006 - 2007 was showing signs of consistency after a particular rise from 2004 - 2005 and then in the year 2007 there was another rise in the net profit 2008 was not a good year for the company as the net profit fell to a great extent directly from 10.11 high to 7.75 low of the company in the time period of these 5 years The company came back strongly with recovering their status and stabilizing their net profit in the year 2010 where they came back to their Net Profit to 10.03% Some of the ways to increase the NPM are: Negotiating a cheaper rent for the premises Cutting down other indirect expenses like providing economy class tickets for travelling rather than business class. Using video conferencing instead of flying over to other destinations unless need be Reducing other overhead expenditure which can be cut down, say for instance, making a policy to shut down the computers, air conditioners/heaters when they are not in use

Efficiency Ratios for Nike Inc. Stock Turnover

Stock Turnover ratio would measure the number of times a firm sells its stocks within a time period. The ratio hence indicates the speed at which a firm sells and replenishes all its stock. The formula to find out Stock Turnover is Stock Turnover = OR Stock Turnover = * 365

• Year 2006. Cost of Goods Sold - $8367.90
  • Average Stock - $1943.9
  • Stock Turnover - 4.30
• Year 2007.  Cost of Goods Sold - $9165.4
  • Average Stock - $2099.3
  • Stock Turnover - 4.37
• Year 2008. Cost of Goods Sold - $10239.6
  • Average Stock - $2280.15
  • Stock Turnover - 4.49
• Year 2009. Cost of Goods Sold - $10571.7
  • Average Stock - $2397.7
  • Stock Turnover - 4.41
• Year 2010. Cost of Goods Sold - $10213.6
  • Average Stock - $2198.9
  • Stock Turnover - 4.64
• Graph of the Stock Turnover from 2006-2010

Analysis:

Inventory turnover ratio or Stock turnover ratio measures the velocity of conversion of stock into sales Usually a high inventory turnover ratio indicates that the stock is fast selling and the management does not face difficulty in conversion of stock into sales In the graph for the stock turnover of Nike Inc it can be observed the rise in the stock turnover ratio for the years 2006-2008 2009 had a drastic fall in the stock turnover This fall was recovered and improved better than 2008 in the year 2010. The low inventory turnover ratio implies that, during that period, the sale of the company has declined The other reason for rise in the ratio could be that the company started producing for increasing its stocks, but considering the situation at that point of time, it seems highly improbable. Only in the industries in which seasonal products are utilized, higher stock turnover ratio can be acceptable

Return on Capital Employed (ROCE)

The ROCE is an efficiency ratio that measures the financial performance of a company as compared with the amount of capital invested. The ROCE is also an indicator of the profitability of a company. ROCE can help investors see through growth forecasts, and it can often serve as a reliable measure of corporate performance. The return on capital employed is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes same profit. The formula to calculate the Return on Capital employed is Return on Capital Employed = * 100

• Year 2006. Capital Employed - $6696.2
  • Net Profit Before Tax and Interest - $1392.0
  • Return on Capital Employed - 20.8%
• Year 2007. Capital Employed - $7435.6
  • Net Profit Before Tax and Interest - $1491.5
  • Return on Capital Employed - 20.06%
• Year 2008. Capital Employed - $8266.7
  • Net Profit Before Tax and Interest - $1883.4
  • Return on Capital Employed - 22.78%
• Year 2009. Capital Employed - $9076.6
  • Net Profit Before Tax and Interest - $1486.7
  • Return on Capital Employed - 16.38%
• Year 2010. Capital Employed - $10119.8
  • Net Profit Before Tax and Interest - $1906.7
  • Return on Capital Employed - 18.69%
• Graph of the Return on Capital Employed from 2006-2010

Analysis: 

The ROCE line shows how the company is able to generate the profits using the resources in their possession If the capital employed falls while the net profits remain the constant it means that the company has been able to achieve the same profit with less capital. This is good for the company The company graph shows that the ROCE was constant in 2006-2007 The company had a reasonable rise in their ROCE in the year 2008 but it dropped drastically in the year 2009, but stabilized in 2010 If the capital employed is high then there could be a decline in the ROCE which could be a reason in the year 2009 2010 is the year where the company begins stabilizing and tries to recover their standards https://www.soccerwallpaper.mackafe.com/var/albums/David-Beckham-Wallpaper-Gallery/beckham-wallpaper-adidas.jpg ADIDAS

Profitability Ratios for Adidas. Gross Profit Margin (GPM)

1 EUR = $1.337479367 The profit would be the key objective for most of the businesses and can help act as the measure of the firm's financial success and performance. GPM ratio shows the value of gross profit as a percentage of the sales revenue. The GPM ratio is expressed as percentage with the help of the formula. Gross Profit Margin =

• Year 2006. Sales Revenue of Adidas - $13,487.1
  • The Gross Profit was - $6015.25
  • Gross Profit Margin - 44.6%
• Year 2007. Sales Revenue of Adidas - $13.774.7
  • The Gross Profit was - $6529.21
  • Gross Profit Margin - 47.4%
• Year 2008. Sales Revenue of Adidas - $14443.4
  • The Gross Profit was - $7033.94
  • Gross Profit Margin - 48.7%
• Year 2009. Sales Revenue of Adidas - $13884.4
  • The Gross Profit was - $6303.52
  • Gross Profit Margin - 45.4%
• Graph of the GPM of Adidas from 2006-2009

Analysis

The trend in the above graph shows the trend of the GPM of the company over 4 years The GPM portrays the profit a company makes after paying off its Cost of Goods sold (COGS) In 2006 the company had a very low GPM, but it increased over the years In the year 2008 the company's GPM reached its peak and even the success of the company was at its highest during that period As discussed earlier GPM is the first aspect to be measured to measure the success of the success of the company. This will provide the company an opportunity to invest more, do more marketing of their company and use the money for research so that the company can develop and grow. In 2009 the company did have a massive fall in their GPM which is a bad sign for the company as it is a huge decline Adidas can increase the price of inelastic products as they can get more sales revenue from the market if the customers respond in a positive way to the change in the prices Example: - Adidas can increase the price of their shoes and the demand of the products does not fall then the strategy can be called successful. Adidas would have to improve their GPM in the year 2010 to recover and not have a negative impact on the minds of the customers and other important stakeholders. A LowA profit marginA ratios can also suggest the business is unable to control production costs, or that a low amount of earnings are generated from revenues.

Net Profit Margins (NPM)

1 EUR = $1.337479367 The NPM Ratio is a better measure of a firm's profitability since it accounts for the company's sales and expenses. The more the NPM the better for the company as the company would have more profit to distribute to shareholders and to reinvest in the business. The NPM is generally high for high volume products. We can calculate the NPM using the following formula. Net Profit Margin =

• Year 2006. Sales Revenue of Adidas - $13487.1
  • The Net Profit was - $1178.3
  • Net Profit Margin - 8.7%
• Year 2007. Sales Revenue of Adidas - $13774.7
  • The Net Profit was - $1269.3
  • Net Profit Margin - 9.2%
• Year 2008. Sales Revenue of Adidas - $14443.4
  • The Net Profit was - $1431.1
  • Net Profit Margin - 9.9%
• Year 2009. Sales Revenue of Adidas - $13884.4
  • The Net Profit was - $679.4
  • Net Profit Margin - 4.9%
• Graph of the Net Profit Margin of Adidas from 2006-2009

Analysis: 

The trend in the above graph shows the NPM of the company Adidas over 4 years. The following trend line shows the NPM for Nike Inc in 2006 - 2007 was showing signs of consistency after a particular rise from 2004 - 2005 and then in the year 2007 there was another rise in the net profit 2008 was not a good year for the company as the net profit fell to a great extent directly from 10.11 high to 7.75 low of the company in the time period of these 5 years The company came back strongly with recovering their status and stabilizing their net profit in the year 2010 where they came back to their Net Profit to 10.03% Some of the ways to increase the NPM are: Negotiating a cheaper rent for the premises Cutting down other indirect expenses like providing economy class tickets for travelling rather than business class. Using video conferencing instead of flying over to other destinations unless need be Reducing other overhead expenditure which can be cut down, say for instance, making a policy to shut down the computers, air conditioners/heaters when they are not in use

Efficiency Ratios for Adidas. Stock Turnover

1 EUR = $1.337479367 Stock Turnover ratio would measure the number of times a firm sells its stocks within a time period. The ratio hence indicates the speed at which a firm sells and replenishes all its stock. The formula to find out Stock Turnover is Stock Turnover = OR Stock Turnover = * 365

• Year 2006. Cost of Goods Sold - $7471.85
  • Average Stock - $1898.55
  • Stock Turnover - 3.94
• Year 2007. Cost of Goods Sold - $7245.49
  • Average Stock - $2164.04
  • Stock Turnover - 3.35
• Year 2008. Cost of Goods Sold - $7409.46
  • Average Stock - $2423.51
  • Stock Turnover - 3.06
• Year 2009. Cost of Goods Sold - $7580.88
  • Average Stock - $2317.85
  • Stock Turnover - 3.27
• Graph of the Stock Turnover from 2006-2009

Analysis

Inventory turnover ratio or Stock turnover ratio measures the velocity of conversion of stock into sales Usually a high inventory stock velocity indicates efficient management because more stocks are sold Graph above for the stock turnover of Adidas shows the decline in the stock turnover ratio from 2006 to 2007 Since 2007 the company had a low stock turnover However the company could not improve its stock turnover ratio over the years The low inventory turnover ratio implies that the products of the company are not selling as fast as they were in the year 2006 The other reason for rise in the ratio could be that the company started producing for increasing its stocks, but considering the situation at that point of time, it seems highly improbable. Only in the industries in which seasonal products are utilized, higher stock turnover ratio can be acceptable

Return on Capital Employed (ROCE)

1 EUR = $1.337479367 The ROCE is an efficiency ratio that measures the financial performance of a firm compared with the amount of capital invested. The ROCE is also an indicator of the profitability of a company. ROCE can help investors understand the growth forecasts as predicted by the company and it can often serve as a reliable measure of corporate performance. The ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes same profit. The formula t calculate the ROCE is Return on Capital Employed = * 100

Note

I have considered net borrowings entirely as the long term debt since working capital includes short term debt

• Year 2006. Capital Employed - $6766.31
  • Net Profit Before Tax and Interest - $1441.80
  • Return on Capital Employed - 21.31%
• Year 2007. Capital Employed - $6405.19
  • Net Profit Before Tax and Interest - $1558.16
  • Return on Capital Employed - 24.33%
• Year 2008. Capital Employed - $7456.45
  • Net Profit Before Tax and Interest - $1711.97
  • Return on Capital Employed - 22.96%
• Year 2009. Capital Employed - $6270.10
  • Net Profit Before Tax and Interest - $1043.23
  • Return on Capital Employed - 16.64%
• Graph of the Return on Capital Employed from 2006-2010

Analysis

The ROCE trend line shows how the company is able to generate the profits If the capital employed falls while the net profits remain constant this shows that the company is earning the same with less amount of capital employed The company graph shows that the ROCE was improving in the years 2006-2007 Improving ROCE is always a good sign for a company but from the year2007 there is a constant decline in the trend which is observed

Comparative Analysis

Graph of the GPM for Adidas (2006 - 2009) & Nike Inc (2006 - 2010)

Analysis

Adidas had started the year 2006 above Nike Inc with a GPM higher than Nike Inc Adidas in the year 2007 has improved their company's standing as there is a constant improvement in their performance The year 2008 saw a successful year for the market as a whole and the performance of both the companies was better, however the performance of Adidas was better than Nike Inc In the year 2009 the companies had a massive decline in their GPM as the world was battling recession, which affected the entire globe as a whole. Adidas had a major decline in their GPM where Nike did not have a very major fall although the company had a decline it was not as bad as Adidas It was also said that the boom of the commodities which was on for 5 years had come to an end

Graph of the NPM for Adidas (2006 - 2009) & Nike Inc (2006 - 2010)

Analysis

Adidas had a relatively low NPM compared to Nike Inc In the year 2006 Adidas had a lower NPM than Nike Inc In the year 2007-2008 they were almost the same Due to the recession in the year 2009 hit Adidas very bad as they had fallen in both the NPM and the GPM Nike Inc on the other hand was not affected that badly due to the recession Reducing other overhead expenditure which can be cut down, say for instance, making a policy to shut down the computers, air conditioners/heaters when they are not in use

Graph of the Stock Turnover for Adidas (2006 - 2009) & Nike Inc (2006 - 2010)

Analysis

Inventory turnover ratio or stock turnover ratio measures the velocity of conversion of stock into sales. The graph shows that Adidas have had a relatively low Stock Turnover than that of Nike Inc throughout the year The graph shows that the stock turnover of the Nike Inc has been very consistent whereas the Adidas company have had a low and declining stock turnover The higher the stock turnover it is better for the company as it shows that the stock gets sold very fast and it also implies that your product has a high demand in the market If the stock turnover is high the company is said to be more efficient in converting its stocks into sales A low stock turnover is bad for a company as it shows that the company has less sales and its product is not much in demand by the customers

Graph of the Return on Capital Employed for Adidas (2006 - 2009) & Nike Inc (2006 - 2010)

Analysis

A company with a high ROCE is normally a highly profitable business The return on capital employed trend line shows how the company is able to generate the profits Return on Capital Employed ratio also indicates whetherA the companyA is earning sufficientA revenuesA and profits in order to make the best use of its capital assets In the year 2007 Adidas had a better ROCE as they had improved their business as and were able to generate more profits and have had a better ROCE that Nike Inc as Nike Inc had their ROCE decline in 2007 Adidas had a decline in ROCE in the year 2008 and Nike Inc improved their ROCE Due to the recession Adidas and Nike Inc both had a drop in the ROCE and again Adidas had a more major drop if compared to Nike Inc

Conclusion

Ratio analysis can be used by not only the management to know its status, but as it projects a trend, it can be used by prospective investors, government agencies etc. The investors can decide whether the company is going through a bad phase or the industry or the index as a whole. Ratio analysis makes it possible to measure the effectiveness of any kind of business. Here, we are looking at two companies which sell similar products in the markets and we are able to know which company is better than the other. Say for instance, if the capital employed by one company is more than the other, then even if the profit is higher it does not mean that each investor will get more dividend as number of shareholders will be more. . After comparing both the companies the highlights of the discussion are: Adidas has a higher GPM as compared to Nike Inc showing that direct costs are lower for Adidas as compared to Nike Inc Adidas has a lower NPM than that of Nike Inc showing that the even though the GPM is higher for Adidas its indirect costs are so high that its overall profitability has reduced The Stock Turnover of Adidas is low compared to that of Nike Inc showing that Nike Inc is able to convert its stock into turnover faster Having the NPM and the Stock Turnover both higher than Adidas, it shows that Nike Inc have their administration and other indirect expenses lower than that of Adidas Due to recession Adidas would be hit more as the stock turnover ratio is low despite high GPM Adidas has a higher ROCE than that of Nike Inc. The high ROCE indicates that a larger amount of money can be re invested in the company and the company can be called a more efficient one.

Cite this page