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Profitability Ratios

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BusMgmt 736

on 1 November 2014

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Transcript of Profitability Ratios

Financial Report Analysis
NIKE, INC.
Return on Equity
Net Income/ Average Stockholders’ Equity

2013


Nike:
23.1%

Adidas:
12.7%


Effective?



Profitability Ratios
Profit Margin
Return on Equity
Return on Assets
Earnings per Share
Price to Earnings Ratio


Profit Margin
Net Income / Net Sales


2013 2012
Nike:
9.7% 9.8%
Adidas:
3.5% 5.5%
Return on Assets
Net Income/ Average Total Assets

2013


Nike:
15.04%

Adidas:
6.80%


Effective?

Ratios
Earnings per Share
Net Income/ Average Number of Common Shares Outstanding


2013 2012 # Outstanding
Nike:
$ 2.71 $ 2.31 (increase) 434,482,246
Adidas:
$ 4.01 $ 3.78 (stay) 209,216,186

* Reason of increasing EPS?


Price to Earnings Ratio
Current Stock Price per Share/ Earnings per Share

2013 2012
Nike:
22.9 22.4
Adidas:
23.1 17.8
Investors are willing to invest?
Liquidity Ratios
Current Ratio
Quick Ratio
Receivables Turnover Ratio
Inventory Turnover Ratio
Current Ratio
Current Assets / Current Liabilities
Solvency Ratios
Debt to Assets Ratio
Debt to Equity Ratio
Times Interest Earned
Debt to Assets Ratios
Total Liabilities/Total Asset

2013 2012
Nike:
0.366 0.329

Adidas:
0.527 0.546
Debt to Equity Ratio
Total Liabilities/Total Equity

2013 2012
Nike:
0.576 0.490

Adidas:
1.116 1.202
Times Interest Earned Ratio
Net Income + Interest Expense + Income Tax Expense/ Interest Expense

2013 2012
Nike:
118.607 77.385

Adidas:
13.064 9.105
DuPont Analysis
Who was riskier?
Compare !

2013 2012
Nike:
3.5 3.1
Adidas:
1.4 1.6
* To satisfy current obligation
Quick Ratio
(Cash+ Short-term Investments+ Account Receivable)/Current Liabilities

2013 2012
Nike:
2.31 1.77
Adidas:
0.73 0.83
>1, good condition
<1, insufficient cash flow
Receivables Turnover Ratio

2013
Nike:
8.1
Adidas:
8.29
Net Sales / Average Accounts Receivables
* The ability to make &collect sales
Inventory Turnover Ratio

2013

Nike:
4.29
Adidas:
2.87
Cost of Goods Sold / Average Inventory
* High => less inventory on hand
Too high => lack inventory
Too low => lots of inventory on hand
Nike DuPont Analysis
Operating efficiency
Asset Effectiveness
Capital Structure
Return on Equity
2013
2012
0.098
1.440
1.576
0.223
0.097
1.509
1.490
0.219
Nike and Adidas DuPont Analysis
Operating efficiency
Asset Effectiveness
Capital Structure
Return on Equity
Nike
Adidas
0.098
1.440
1.576
0.223
0.055
1.249
2.116
0.144
Horizontal Analysis
and Vertical Analysis
Critical Accounting Issue
Dramatically Increasing of Outstanding Stock
* Two-for-one stock split
Let's briefly learn the background of Nike Inc.
Nike Inc. was founded by University of Oregon track athlete
Philip Knight
and his coach
Bill Bowerman
in January 1964.
They two formed Blue Ribbon Sports to make quality running shoes and sold at Track Meets. Nike, named after the Greek Goddess of Victory
1972 Olympics, convinced some of the runners to wear their shoes
By1979 had obtained 50% of the running shoe market
Went public in 1980
1992, opened the first NIKETOWN
1997, launched Jordan-Brand footwear
2000, expanded into the electronic market such as heart monitors, two-way radios, and MP3 players.

The gross profit of Nike is US$11,034 millions.
The net income of Nike is US$2,485 millions.
As we known, Nike sponsors many high-profile athletes , such as C. Ronald, Michael Jordan, Tiger Woods and sports teams around the world, with the highly recognized trademarks of "Just Do It" and the Swoosh logo.
In 2013, they spent around US$32.4 million on Net TV commercials and another US$ 39.8 for magazine ads.
Nike is now one of the biggest sport brand in worldwide. And also, it is the market leader in the manufacturing of sportswear, gear and enjoys possessing more than 20% of the market share across the globe.
There is a dramatic quotation in Nike’s 2013 annual report “Nike’s mission is to bring inspiration and innovation to every athlete”
( Nike Inc., 2013 ).
Nike's world headquarters are surrounded by the city of Beaverton. They have over 700 shops around the world and offices set up in 45 countries outside The United States. Most of its factories are located in Southeast Asia including China, Indonesia, Taiwan, India, Vietnam, Thailand, Philippines, Pakistan, and Malaysia.
There are hundreds of thousands of reasons behind their success; whereas, cost consideration prior strategy and wild range retail structure ensure them to cancel their alliance with any company that fails to maintain their criteria. They work very closely with their suppliers which allow them to produce their goods at a very low price and of superior quality with the newest technology. To do so, the market leader and the rest have to try producing similar goods close to their standard in order to survive in the market. ( revise from “Comparison of strategy between Nike Inc. & Adidas Inc.”, 2013 )
Conclusion
By the end of the analysis, Nike and Adidas have almost similar strategies but different implementation methods. And both the companies concentrate heavily on technology and strive to produce new and innovative products. Nike focuses on the American markets whereas Adidas focuses on the European market.
Over the past decade, the revenue and earnings per share has grown 9% and 15%. And the return on invested capital has increased from 18% to 24%.
The business level strategy of Nike is a combination of the best cost provider and broad differentiation strategy, but more focus on the best cost provider strategy. It refers to a mix of independent distributors, licensees and sales representatives in virtually all countries around the world.
According to management discussion section in annual report of Nike Inc. Their market goal is to achieve long-term revenue growth by creating innovative & “must have” products. And Nike strive to deliver shareholder value by make several areas in operational excellence:


1. Supply chain competitive advantages.
2. Reducing product cost through a continued focus manufacturing efficiency, product design and innovations.
3. Delivering innovative, premium products that command higher prices while maintaining a stronger consumer price-to-value proposition.
4. Improving selling and administrative expenditure productivity by focusing on investments that drive economic returns in the form of incremental revenue and gross profit.
5. Leveraging existing infrastructure across our portfolio of business to eliminate duplicative costs.
6. Improving working capital efficiency and deploying capital effectively.

That means high single-digit revenue growth, mid-teens earnings per share growth, increase return on invested capital and accelerate cash flow.
On the contrary, Adidas Inc. focuses more the broad differentiation strategy. Their operational activities are significantly influenced by
currency effects
,
transfer of costs for services provided
,
interest result
and
income from investments in companies
. According to the annual report of Adidas, there are 52% of total assets in 2013 related to financial assets, and declined 88% to US$ 54.6 millions in 2013 from US$ 445 millions in 2012. This strong pluge down attribute to lower interst transfers from affiliated companies under profit and loss transfer agreements.
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