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The Final Paper will involve applying the concepts learned in class to an analysis of a company using data from its annual report. Using the concepts from this course, you will analyze the strengths and weaknesses of the company and write a report either recommending or not recommending purchase of the company stock. Research Tip: The “Mergent” database in the Ashford University Library contains company profiles and financial information for publicly traded companies and their competitors. To access this database enter the Ashford Library and select “Find Articles and More” in the top menu panel. Next, select “Databases A-Z” and go to section “M” for “Mergent”. For help with using Mergent, use Mergent Online Quick Tips.

For help with reading an annual report access this handy guide (Links to an external site.)Links to an external site. from Money Chimp. 

Financial Analysis

The main objective of the report is to analyze Nike Inc. through using the data from the annual report of the company. The report will analyze the weaknesses and strengths of the company and recommending for investing in the stock of the company. Further, for analyzing the company various financial ratios like liquidity ratio, profitability ratios, activity ratios and gearing ratios will be used. Nike Inc is the leader in distributing, marketing and designing the authentic athletic apparel, footwear, accessories and equipment for large range of fitness and sports activities. Further, the wholly owned subsidiary of the company Converse designs distributes and markets the athletic lifestyle apparel, accessories and footwear. The mission of the company is bringing innovation and inspiration to each athlete all over the world. The founder of Bill Bowerman believes that if a person has body, he is an athlete. However, the vision statement of the company is subject to speculation taking into consideration the information scarcity from the entity with regard to the corporate vision. As the leading producer in the sports equipment, apparel and shoes, the company shall maintain its mission and vision that is appropriate to their business in the global market (Nike.Just Do It.Nike.com, 2018).

Particulars

Amt (in millions)

 Revenue

 $             37,785

 Cost of sales

 $             20,942

 Gross profit

 $             16,843

 Demand creation expense

 $               3,400

 Operating overhead expense

 $               7,343

 Total selling and administrative expenses

 $             10,743

 Interest expense

 $                    75

 Interest income

 $                  225

 Income before income taxes

 $               6,250

 Income tax expense

 $                  813

 Net income  

 $               5,438

Particulars

Amt (in millions)

Assets

Current assets:

Cash and equivalents

 $               3,900

Short-term investments

 $               2,300

Account receivable, net

 $               3,917

Inventories

 $               5,123

Prepaid expenses and other current assets

 $                  950

Total current assets

 $            16,190

Property, plant and equipment, net

 $               3,590

Identifiable intangible assets, net

 $                  283

Goodwill

 $                  139

Deferred income taxes and other assets

 $               4,200

Total assets

 $             24,402

Liabilities and shareholders' equity

Current liabilities

Current portion of long term debt

 $                      8

Notes payable

 $                  550

Accounts payable

 $               1,820

Accrued liabilities

 $               3,050

Income taxes payable

 $                  108

Total current liabilities

 $              5,536

Long term debt

 $               3,800

Deferred income taxes and other liabilities

 $               1,200

Common stock at the stated value

Class B - 1314 and 1329 shares outstanding

 $                      3

Capital in excess of stated value

 $               8,638

Accumulated other comprehensive income/ (Loss)

 $                (213)

Retained earnings

 $               5,438

Total shareholders' equity

 $            13,866

Total liabilities and shareholders' equity

 $             24,402

Ratio

Formula

Result

Liquidity ratio

Current ratio

Current assets / current liabilities

2.93

Quick ratio

Current assets less inventories and prepaid expenses / Current liabilities

1.80

Financial leverage

Debt ratio

Total liabilities / Total assets

0.47

Equity ratio

Total equity / Total assets

0.53

Profitability ratio

Gross profit margin

Gross profit / Sales * 100

44.58

Operating profit margin

Operating profit / Sales * 100

13.47

Market value ratio

Earnings per share

Given

2.56

Price earnings ratio

Market price of share / EPS

Debt ratio

Debt ratio

Total liabilities / Total assets

0.47

Debt to equity ratio

Total liabilities / Total equity

0.87

Per share

Earnings per share

Given

Price earnings ratio

Market price of share / EPS

Measures of relative value

Earnings per share

Given

2.56

Price earnings ratio

Market price of share / EPS

Activity ratio

Trade receivable turnover

Credit sales / Average accounts receivable

9.93

Inventory turnover

COGS / Average inventory

3.85

Cash flow ratio

Operating cash flow ratio

Cash flow from operations / Sales

0.11

Current liability coverage ratio

Cash flow from operations / liabilities

0.34

Liquid ratio – the term liquidity states the company’s ability to meet the financial obligation. It measures the ability of the company for paying off its short-term obligation on becoming its due (Post & Byron, 2015). Current ratio measures the current liabilities of the company against its current assets. On the other hand the quick ratio or acid test ratio measures the liquidity position of the company without taking into consideration the least liquid assets like prepaid expenses and inventories. Looking into the liquid ratio computation of the company for the year 2017 it has been found that the both the current ratio as well as the quick ratio of the company both are better than average (Albertini, 2013). Therefore, the liquidity status of the company is stable and strong. 


Financial leverage – it measures the equity value of the company through analysis of the overall debt status. To be more specific, financial leverage measures overall load of debt as compared to the equity or assets of the company. It reveals the percentage of assets belongs to the shareholders and the percentage of asset belongs to the creditors (Saeidi et al., 2015). When the major part is owned by the shareholders then the company is considered as less leveraged and on the contrary when the major part is owned by the creditors then the company is considered as highly leveraged. As it can be observed from the computation table that the 47% of the company’s assets are held by creditors whereas 53% is held by the shareholders. Therefore, the company will be regarded as less leveraged.

Liquidity Ratio

Profitability ratio – this metric is used by the company for evaluating and measuring the ability to generate income after meeting all the expenses. Creditors, stockholders and investors use this ratio for judging the return on investment of the company on the basis of relative level of the assets and resources. In other words, the profitability ratio is associated with the efficiency as they reveal the efficiency of the company regarding using of its assets for generating profits. Looking at the profitability ratios of the company it can be recognized that the company’s profitability position is stable and strong as the gross profit ratio is 44.58% and the operating profit margin is 13.47% 


Market value ratio, per share ratio and relative value measurement ratio – the market value ratios are used by the company for analyzing the current price of the share of company’s stock.  Market value ratios are not watched closely by business mangers as the individuals are much concerned regarding the operational issues (Karna, Richter & Riesenkampff, 2016). However, these ratios are used or applied only for the publicly held entities and not for the privately held companies as no accurate ways are there to allocate the market value to its shares. Relative measurement is the method of deriving the ratio scales from the paired comparisons that is represented through absolute numbers. It assists the business owners and investors to determine the company’s financial health (Karim & Arif-Uz-Zaman, 2013). For measuring these metrics the ratios those are mainly used by the investors are the earning per share and price earnings ratio. Earnings per share are the percentage of profit that is allocated to each outstanding common stock of the company. On the other hand, price earnings ratio is used for valuing the company through measuring the current stock price of the company as compared to the earning per share. Looking into the annual report of the company and its stock prices it is found that the EPS of the company for the year ended 2017 was $ 2.56 whereas the PE ratio of the company for the same period was 20.43. As it can be seen that both the ratios of the company are strong, it can be stated that the company is running its business efficiently (Melnyk et al., 2014).

Activity ratio – it is the tools for analyzing the financial health of the company for measuring the ability to convert its assets, capital accounts and liabilities into sales or cash. If the business can do it quickly it will be regarded as more efficient (Delen, Kuzey & Uyar, 2013). The accounts receivable turnover under the activity ratio is the technique that is used for measuring the efficiency of the company in collecting the money that is due from the customer. On the other hand, the inventory turnover ratio gauges how many times the company is able to sell its inventories under specific accounting period. If the inventory turnover rate is high then the business will be considered as efficient (Sharda, Delen & Turban, 2013). Looking into the activity ratios of the company is found that the trade receivable turnover as well as the inventory turnover ratio of the company both is strong and the company will therefore be regarded as efficient.

Financial Leverage

Cash flow ratio – this is regarded as important as it states the relationship among the cash generated from sales and operations. Each company requires cash for paying service debt, supplier’s dues, dividends and investing into new asset (Rosenbusch, Rauch & Bausch, 2013). Looking into the cash flow ratio of the company it can be observed that the company has sufficient cash to pay off its operating expenses and short-term obligations. 

As per DuPont system the return on equity = Net profit margin * Asset turnover * Equity multiplier (Padake & Soni, 2015).

Revenue = $ 34,350

Net income = $ 4,240

Assets = $ 23,259

Shareholder’s equity = $ 12,407

Net profit margin = Net profit / sales = $ 4,240 / $ 34350 = 0.1234

Asset turnover = Revenue / Assets = $ 34,350 / $ 23,259 = 1.4768

Equity multiplier = Assets / Shareholders’ equity = $ 23,259 / $ 12,407 = 1.8747

Therefore, return on equity = 0.1234 * 1.4768 * 1.8747 = 0.3417 or 34.17%

Rf = 1.3%, Rm = 4%, Beta = 0.55

Therefore, cost of equity that is Ke = Rf + b (Rm – Rf) (Wild, Wild & Han, 2014). 

Where,  Rf = risk free rate, Rm = market return and b = beta

Ke = 1.3 + 0.55 (4 – 1.3) = 2.65%

Cost of debt = 0.86%

Tax rate = 13.2%

Capital type

Amount

%

Long term debt

 $                                     3,471.00

22%

Equity

 $                                    12,407.00

78%

Total capital

 $                                    15,878.00

100%

Weighted average cost of capital (WACC) = We*Ke + Wd*Kd (1 – tax rate)

WACC = 0.78*0.0265 + 0.22*0.0086(1-0.132)

WACC = 0.022 or 2.23%

EVA = NPAT – (capital invested * WACC) (Schawel & Billing, 2018).

EVA = $ 4,240 – ($ 23,259 * 2.23%)

EVA = $ 3,721.32 million

All the measures those are used for analyzing the performance of the company, EVA is the most accurate among all. As it can be seen that the EVA of the company is positive and is amounted to $ 3,712 million it can be stated that the company is creating value from the invested funds. Further, the management’s performance is appreciable as the company is creating positive value (Blerck & George, 2013). 

Nike Inc is exposed to the global market risk that includes the impact of changes in the rate of interest and exchange rate of foreign currency (Cavusgil et al., 2014). It uses the derivatives for managing the financial exposures that takes place under the normal course of operation. Other risks that the company may face are the foreign exchange risk that is associated with fluctuation in the currency value and political risks like changes in the policy, political leadership that may create the trade barriers.

Profitability Ratio

Conclusion and recommendation 

It has been concluded from the above discussion that if the financial performance of the company is considered it will be considered that financially the company is stable and healthy. Looking into the liquid ratio of the company it has been found the liquidity status of the company is stable and strong. Further, the company is regarded as less leveraged and efficient in converting its assets into cash. Moreover, it is able to create shareholder’s wealth as the return of equity of the company is quite high that is 34.17%. The positive EVA also stating that the management is efficient in creating value from the invested funds. However, the company is recommended to raise additional fund through debt instead of equity as the long term debt of the company is only 22% of total capital. 

Reference 

Albertini, E. (2013). Does environmental management improve financial performance? A meta-analytical review. Organization & Environment, 26(4), 431-457.

Blerck, V., & George, T. (2013). The relationship between executive remuneration at financial institutions and economic value added (Doctoral dissertation, University of Pretoria).

Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014). International business. Pearson Australia.

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.

Karim, A., & Arif-Uz-Zaman, K. (2013). A methodology for effective implementation of lean strategies and its performance evaluation in manufacturing organizations. Business Process Management Journal, 19(1), 169-196.

Karna, A., Richter, A., & Riesenkampff, E. (2016). Revisiting the role of the environment in the capabilities–financial performance relationship: A meta?analysis. Strategic Management Journal, 37(6), 1154-1173.

Melnyk, S. A., Bititci, U., Platts, K., Tobias, J., & Andersen, B. (2014). Is performance measurement and management fit for the future?. Management Accounting Research, 25(2), 173-186.

Nike.Just Do It.Nike.com. (2018). https://www.nike.com/us/en_us/. Retrieved 26 March 2018, from https://www.nike.com/us/en_us/

Padake, V., & Soni, R. (2015). Measurement of efficiency of top 12 banks in India using DuPont analysis. IUP Journal of Bank Management, 14(4), 59.

Post, C., & Byron, K. (2015). Women on boards and firm financial performance: A meta-analysis. Academy of Management Journal, 58(5), 1546-1571.

Rosenbusch, N., Rauch, A., & Bausch, A. (2013). The mediating role of entrepreneurial orientation in the task environment–performance relationship: A meta-analysis. Journal of Management, 39(3), 633-659.

Saeidi, S. P., Sofian, S., Saeidi, P., Saeidi, S. P., & Saaeidi, S. A. (2015). How does corporate social responsibility contribute to firm financial performance? The mediating role of competitive advantage, reputation, and customer satisfaction. Journal of Business Research, 68(2), 341-350.

Schawel, C., & Billing, F. (2018). Economic Value Added. In Top 100 Management Tools (pp. 113-115). Springer Gabler, Wiesbaden.

Sharda, R., Delen, D., & Turban, E. (2013). Business intelligence: a managerial perspective on analytics. Prentice Hall Press.

Wild, J. J., Wild, K. L., & Han, J. C. (2014). International business. Pearson Education Limited.

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