Uiversity Name
Part A:
Annuity: Stream of equal cash flows that are to be paid to an investor at equal intervals over a period of time
Present Value: Today’s value of a cash flow that is to be received at some point in the future
Future Value: Amount to which a current deposit will grow over time when invested in an interesting paying instrument.
Amortization: Periodic allocation of the cost of intangible assets owned by the company over a period of time
Debt: An amount owed by an individual or an organization to the lender. It is represented in the form of bonds, bank loan, commercial paper, et cetera
Bond: A debt instrument issued by a borrower company to the investor with a promise to repay the borrowed amount at a future date along with timely interest payments based on the amount borrowed
Equity: Stock value representing a proportionate ownership in an entity
Zero Coupon Bond: A debt instrument issued by a borrower company to the investor at a discount to its face value but with no interest payments to be made.
Primary Market: A market platform that issues new financial instruments such as Initial Public Offering and newly issued bonds.
Debenture: A long-term debt instrument issued by the borrower company to the investor with a promise to repay the borrowed amount at a future date along with a fixed interest rate.
Part B:
About the paper
The paper is based on conducting financial analysis of Nike Inc. for the years, 2013 and 2014. For this purpose, we will be using raw financial figures of the company and will run them through the microscope of financial ratios and horizontal analysis. In addition, we will also compare the financial figures of the company with that of its rival, Under Armour.
About the company
Founded in the year 1964, Nike Inc. is an American multinational entity that is engaged in the design, development, manufacturing and selling of athletic footwear, apparel and accessories. At present, the company enjoys the status of industry behemoth and holds 15% of the total market share in $255 billion global sportswear market. By the end of 2014, the company recorded sales amount of $27799 million. The brand value of the company is calculated to be $19 billion, making it one of the most valuable brand in the world.
Main source of revenue
Nike Inc. source its revenue from Footwear, Apparel and Equipments with Footwear accounting for the maximum proportion of the total sales of the company. By the end of 2014, footwear sales accounted for 58.30% of the total sales of the company. In terms of geographic division, North American division accounted for maximum sales as it accounted for 44.24% of the total sales of the company.
Financial multiples
The figures in the above table validate the gigantic and the behemoth structure of Nike Inc. relative to its American competitor, Under Armour. Beginning with the sales figure, by the end of2014, Nike Inc. recorded sales figure of $27799 million, while Under Armour recorded sales figure of $3084 million.This indicates that the sales of the latter company accounted for merely 11.09% of the former.
Nike Inc. also holds a huge asset base amounting to $18594 million, while Under Armour operates with an asset base of $2095, amounting to 11.26% of the total assets of Nike Inc.
Review of Income Statement
For the purpose of analyzing the past three year income statement of the company, we used common size analysis and found optimistic trends relating to the financial standing of the company. Our analysis revealed that over the period of past three years, the revenue figures of the company have increased consistently. During 2013, the sales figures surged by 4.91% , followed by an increase of 9.82% in 2014. In addition, Nike Inc. has also employed a prudent cost model that has resulted in strong profitability for the company. Important to note, while the revenue figures of the company surged consistently, the proportion of cost of sales to the revenue figures stayed constant at 54% and this fueled the gross profits of the company year-by-year. Similarly, a controlled proportion of the operating expenses relative to revenue figures also resulted in an increase in operating and net profits of the company.
Review of Cash Flow Statement
-Cash Flow from Operations
Referring to the cash flow statement of the company, we found that during the year, the CFO has increased from $2968 million to $3003 million, an increase of 1.18%. The increase here is largely attributed to increase in the net income position of the company.
-Cash flow from Investing Activities
While the company maintained a high level of efficiency in its operations, it also increased its investment in the capital assets. During the year, Nike Inc. shelled a total net cash amount of $1207 million on investing activities, recording an increase of 28.40% from the previous year.
-Cash Flow from Financing Activities
Most notable amongst the financing activities of the company was repurchase of common stock amounting to $2914 million. This signals a strong belief of the management for the consistent success the company. Overall, during 2014, Nike Inc. released a total cash amount of $1117 million as part of financing activities.
-Change in Total Cash Amount
Over the year, owing to large cash outflows I investing and financing activities, the cash position decreased from $3337 million to $2220 million.
Ratio Analysis
In this section, we will be using the raw financial figures of the company to calculate financial ratios and understanding the ongoing financial position of the company. In order to adopt a comprehensive approach, we have used multiple financial ratios relating to liquidity, profitability, solvency and asset management. Below presented are the calculations and related analysis:
-Liquidity Ratios
i)Current Ratio: Current Assets/ Current Liabilities
2013: 13630/3962= 3.44
2014: 13696/5027= 2.72
ii) Quick Ratio: Cash+ Receivables/ Current Liabilities
2013: (3337+3117)/3962= 1.62
2014: (2220+3434)/5027= 1.12
Referring to the above figures, we can see that the company witnessed a marginal decline in its liquidity standing. Beginning with the current ratio, the multiple plummeted from 3.44 to 2.72 owing to higher proportionate increase in the current liabilities relative to the current assets of the company. We also confirmed our analysis using the stringent multiple of quick ratio and found the similar trend as the multiple decreased from 1.62 to 1.12.
However, for a company that owns current assets almost three times to its current liabilities, we cannot rate the liquidity standing as negative. Therefore,even though during the year the working capital position has undergone a negative trend, but the liquidity position of the company is strong enough to honor its short-term obligations as and when they become due.
ii)Profitability Ratios
-Net Profit Margin: Net Profit/ Revenue
2013: 2472/25313= 9.69%
2014: 2693/27799= 9.68%
-Return on equity: Net Income/ Total Equity
2013: 2472/11081= 22.30%
2014: 2693/10824=24.87%
Referring to the above figures, we witness that during 2014, the net margin of the company remained fairly constant, despite of an increase in the bottom line profits of the company. This was attributed to higher proportionate increase in the revenue figures of the company relative to revenue figures. However, the shareholder community will be ecstatic to witness the increasing trend in the ROE multiple of the company that surged from 22.30% to 24.87%. This confirms that the entity was able generate higher profits on the equity capital it had borrowed.
iii) Solvency Ratios
-Debt-Equity Ratio: (ST Debt+ LT Debt)/ Equity
2013: 1365/11081=0.12
2014: 1373/10824= 0.12
-Interest Coverage Ratio: Operating Income/ Interest Expense
2013: 3254/3= 1084.66
2014: N/A
With the intend to understand the capital composition of the company, we calculated the debt-equity ratio of the company and found that over the year, the multiple has remained constant at 0.12. The no-change’ feature in the capital is the result of marginal increase in debt position been set-off by an equal amount of decrease in the equity position. Important to note, during 2014, Nike Inc. did not made any interest expense, rather, it received 33 million as interest. Accordingly, we were not able to able to calculate the interest coverage ratio of the company for the year
However, considering a low debt-equity ratio, we can conclude that Nike Inc. is highly solvent and owns the capability to honor debt-commitments.
iv) Asset Management Ratios
-Inventory Turnover Ratio: COGS/ Inventory
2013: 14279/3484= 4.09
2014: 15353/3947= 3.88
-Asset Turnover: Revenue/ Total Assets
2013: 25313/17545= 1.44
2014: 27799/18594= 1.49
The ratios guided us to understand the asset management policies of the company and how well the entity is using the asset base. Referring to the above calculations, we can see that during the year, the inventory turnover ratio of the company declined from 4.09 to 3.88. This indicates that it took more time for the company to sell their inventory this year and hence, capital was tied up in the inventory for a longer perod of time. However, the turnover from the entire asset base increased from 1.44 to 1.49. This indicates that the management was able to generate higher revenue figure on per unit of the asset item available.
Overall, an optimistic trend in the asset management position of the company.
References
Alhabeeb, N. (2012). Time Value of Money. Wiley Library.
Nike Inc. (2014). Annual Report 2014. Nike Inc.
Profile: Nike Inc. (n.d.). Retrieved February 14, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/pr?s=NKE
