Introduction
The paper is commissioned to perform financial analysis for Nike Inc. As part of this analysis, we will extensively discuss the current position of the company in the industry and how well it is forecasted to survive in the future amid the ongoing developments in the industry. However, the main focus of this paper will be to unearth the financial standing of the company over the recent past two years using the tool of financial ratios. In order to incorporate cross-section analysis in our analysis, we will also compare the ratio multiples with the competitor firm, Under Armour.
About the company
Founded in the year 1964, Nike Inc. is an American multinational that is engaged in design, distribution and marketing of athletic apparels, footwear and accessories. By the end of 2015, the company held 15% of the total market share of the $255 billion global sportswear market, followed by Adidas, which holds 11% of the total market share. The company enjoys the status of industry behemoth with revenue of more than $30 billion. Even the brand value of the company is valued around $19 billion, thus making it one of the most iconic and valuable brand around the globe. It is a matter of no debate that over the six decades of its presence in the market, the company has defined and revolutionized athletic footwear and apparel industry. Highlighted below are some of the key statistics related to the company:
Competitive Environment
Nike Inc. operates in a competitive environment where both international companies, such as Adidas and Puma, and domestic companies such as Under Armour and Sketchers competes with the company. While domestic companies and other local brands impose a negligible competitive threat, German companies, Adidas and Puma are considered to be top rival or Nike Inc. This is validated from the fact that at the end of 2015, Nike Inc. held 15% market share, followed by 11% market share of Adidas and 2.1% share for Puma .
Industry Analysis
Sports apparel and footwear industry is being revolutionized and is getting poised for growth as the trend for healthy living and fitness attain a global voice and support. By the end of 2015, the industry had a total market of $270 billion, however, with a large section of youth and even adult adopting healthy lifestyle, the demand for not-so-mundane looking athletic apparels and footwear will peak and will benefit the industry participants. According to a report released by Morgan Stanley, during the past seven years, the industry has grown by 42%, but considering the pace with which urge to fitness is spreading around the world, the industry is forecasted to grow by 30% in next four years and by 2020, it is expected to generate an additional $88 billion in sales. Overall, market analysts are really bullish about the growth of the participants in the sports apparel and footwear industry.
Ratio Analysis
This section discusses the financial ratios for Nike Inc. and its competitor, Under Armour for the period of 2014 and 2015. As already indicated in the introductory section, since we are interested in comprehensive analysis, we will be using multiple financial ratios that will help us in gaining insight into the financial position of the company and its competitor firm. Discussed below are the financial ratios along with the factors that led to the trends in those ratios:
-Liquidity Ratios
i)Current Ratio: Current Assets /Current Liabilities
ii) Quick Ratio: (Cash+Receivable)/ Current Liabilities
As noted from the above calculations, both the companies have witnessed declining trend in their liquidity position during the past year, however, the analysis was noteworthy here. Beginning with the current ratio, we found that Nike Inc. witnessed decline in the ratio multiple from 2.72 to 2.52 on the account of higher proportionate increase in the current liabilities, which increased by 26% relative to the current assets, which increased by 16.65%. On the other hand, a similar trend was witnessed in Under Armour, which also witnessed the decline in the current ratio multiple from 3.67 to 3.13. So far, we were getting indications that Under Armour is having a better liquidity standing than Nike Inc.
However, it was the quick ratio that provided information about the real scenario. Our calculation for quick ratio multiple indicates that while Nike Inc. witnessed the ratio declining from 1.71 to 1.47 with the proportionate increase in the current liabilities surpassing the proportionate increase in the cash and receivable amount, however, despite of the decline, the multiple was higher than that of Under Armour, whose quick ratio plummeted from 2.07 to 1.18 during 2015. This confirms that Nike Inc. is having more liquid assets and better liquidity standing than Under Armour.
-Profitability Analysis
i) Operating Margin: Operating Profit/Revenue
ii) Return on Equity: Net Income/ Total Equity
iii) Return on Capital Employed: Net Income/(Total Assets- Current Liabilities)
Referring to the above calculations, we can see that benefiting from its vintage brand equity, Nike Inc. earns a sustainable amount of profitability surpassing its competitor firm. Beginning with the operating margin, during 2015, the ratio multiple increased from 13.24%to 13.64% on account of 10.08% increase in the revenue figures, a lower proportion of cost of sales to the revenue figures and a controlled operating cost structure. All these factors helped the company to record higher operating margin during 2015. On the other hand, Under Armour witnessed the opposite trend as the operating margin of the company declined from 11.48%to 10.32%. Important to note, during 2015, Under Armour reported a 28.50% increase in the revenue figures, however, the benefit was largely eroded as the company failed to control its cost structure with proportion of cost of goods sold and operating expenses surging higher and thus eroding the profit margins of the company.
Next, we analyzed the profitability situation of the company from the perspectives of the equity holders by calculating Return on Equity (ROE). Here also, we found Nike Inc. surpassing Under Armour. Our results indicate that during the year, the ratio multiple of the company increased from 24.88% to 25.76%, while Under Armour failed to generate higher margin on its equity capital with ROE multiple decreasing from 15.41% to 13.97%. This signals that investors will show higher confidence in Nike Inc. and since the company is offering high return on equity capital with minimal risk, it will be able to procure equity capital at lower cost.
Finally, we calculated the return on capital employed to further validate our analysis relating to the profitability of the company. Our calculation revealed that Nike Inc. has been utilizing its capital more efficiently and was able to generate higher return on its capital with ROCE multiple surging higher from 19.85% to 21.44%. On the other hand, the inability of Under Armour to effectively deploy its capital was validated with the outcome of ROCE multiple that plummeted from 12.43% to 9.75%.
Overall, our analysis confirmed that Nike Inc. is earning sustainable profit margins both from operations and on the capital available. This factor will further turn the investors optimistic for the company and the entity will benefit with the availability of low cost capital and bullish trend in the stock price.
-Leverage Analysis
i) Debt-Equity Ratio: (Short term debt+ Long term debt)/ Total Equity
ii) Debt Ratio: Total Debt/ Total Assets
Leverage ratios provide us with the insight into the capital structure of the company and how efficiently or optimally it is balancing the capital structure components. Referring to the above calculations, we witnessed that during the year the debt equity ratio of the company has decreased from 0.13 to 0.10. This indicates that the company is reducing its reliance on debt funding and is thus exposing its equity owners to lower risk levels. Similarly, the debt ratio have have also decreased from 0.07 to 0.06, which indicates that compared to the previous year, only 6% of the total assets of the company were financed through leverage amount.
On the other hand, Under Armour opted for higher leverage with debt-equity ratio increasing from 0.21 to 0.40. Moreover, the debt ratio of the company increased from 0.14 to 0.23, this indicates that almost a quarter of the company’s assets are financed with debt funds.
On the whole, our analysis confirmed that Nike Inc. is a highly solvent entity and over the year, the low reliance on debt funding and minimal growth in external equity capital indicates that the company is making efficient use of the financial resources and is generating high returns while assuming low risks.
Asset Management Ratios
-Inventory turnover ratio: Cost of Goods Sold/ Total Inventory
-Asset Turnover ratio: Revenue/ Total Assets
Asset management ratios
i)Inventory Turnover Ratio: Cost of Goods Sold/ Total Inventory
ii) Asset Turnover Ratio: Revenue/ Total Assets
Asset management ratios provide information as how efficiently the management of the company is utilizing its asset base. To analyze the asset management efficiency of Nike and its competitor, Under Armour, we calculated Inventory Turnover Ratio and Asset Turnover Ratio. Here also, the results favored Nike.
Beginning with the inventory turnover ratio, during 2015, the multiple decreased marginally from 3.91 to 3.81 indicating that this year it took a little more time for the company to sell its inventory. However, compared to Under Armour, the results were significantly better. As for Under Armour, the inventory turnover multiple decreased from 2.93 to 2.63 indicating that it takes significantly more time for the company to sell its inventory compared to the inventory selling period of Nike Inc.
Next, we analyzed the asset turnover ratio of both the companies and found that even though both of them witnessed a declining trend during 2015, however, Nike was still doing better than Under Armour with the turnover ratio of 1.42 compared to 1.38 for the latter company. This indicates that Nike is generating more revenue per unit of the asset available.
Overall, the outcome of asset management ratios also favors Nike Inc., confirming that the management has been efficiently utilizing its asset base.
-Market-based valuation
i)PE Ratio: Market Price per share/Earnings per share
PE ratio is the most popular market based multiple used by the analysts to judge the market sentiments related to future growth potential of the stock. Our calculation revealed that during 2015, Nike Inc. witnessed high PE ratio, confirming optimistic outlook of the company for the future. On the other hand, Under Armour also witnessed an increase in the PE ratio multiple, however, the increase here was unsustainable as it was sourced from low EPS multiple of the company and not on the grounds of high stock price.
Cash Flow Analysis
Important to note, the preceding section related to the financial ratios of Nike Inc. was entirely based on the raw financial figures available in the company’s income statement and balance sheet. However, since both of these financial statements are prepared on an accrual accounting basis, there is always a probability that the company might have fabricated these financial statements to showcase a better financial health to the investors than the actual scenario.
Henceforth, in order to concrete our analysis and to provide a prudent recommendation to the investors, we analyzed the cash flow statement of the company as the same is prepared on cash basis and offers minimal chances of fabrication to the company.
Referring to the cash flow statement of Nike Inc., we witnessed that during the year, the amount of operating cash flow surged by 55.84% and since this amount is significantly higher than the net income of the company, it also confirms high quality of earnings of the company.
As for investing activities, during 2015, the company continued to enhance its capital asset base and invested $963 million in capital assets and also purchased investment instruments worth $5086 million. However, since a large section of these capital purchases were funded through amount available on maturity of the investment instruments amounting to $5871 million, the company only spent $175 as net cash on the overall investing activities.
Finally, the trend in cash flow from financing activities signals towards the prudent cash management policy of the company. Important to note, during 2015, the company retired some of its outstanding debt worth $26 million, but spent a massive amount of $2534 million on repurchase of treasury stock while paying dividend of $899 million to the shareholders.This is a clear indication that management is highly optimistic about its future potential and large scale purchase of treasury stock and payment of dividend at the same time, validates this conclusion.
Overall, the trend in the cash flow statements signals toward a strong financial position of Nike Inc.
Conclusion: Strong Buy
On the basis of industry analysis and the fundamental analysis of the company, we issue a ‘Strong Buy’ recommendation for the company’s stock as all the trend confirms that the company has a strong potential to generate high returns for its investors and with market analysts forecasting 30% growth in the industry by 2020,this leaves no doubt that with Nike being the frontrunner in the industry, will benefit the most. Hence, we assert that for an investor with a long-term horizon of 3-5 years, Nike is a must include in his/her portfolio. Our analysis also aligns with the market analysts following the stock:
References
Profile: Nike Inc. (2016). Retrieved March 4, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=NKE
Competitors: Nike Inc. (n.d.). Retrieved March 29, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/co?s=NKE
Morgan Stanley. (2015, Ocotber 30). Athletic Lifestyles Keep Apparel Sales Healthy. Retrieved March 4, 2016, from http://www.morganstanley.com/ideas/global-athletic-wear-geared-for-growth
Nike Inc. (2015). SEC 10K. Nike Inc.
Nike- Key Stats and Figures. (n.d.). Retrieved March 29, 2016, from Statista: http://www.statista.com/topics/1243/nike/
Under Armour. (2015). SEC 10k, 2015. Under Armour.
Appendix:
Common-size Income Statement: Nike Inc.
Common-size Balance Sheet: Nike Inc.
