FIN500-Analyze The Weaknesses And Strengths Of The Nike Inc

Introduction 

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).

Pro-forma income statement for the year 2018

Pro-forma income statement for the year 2018

Computation of ratio

Ratio analysis 

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.

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.

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. 

Computation of return on equity under DuPont system

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%

Economic value added (EVA)

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%

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). 

Financial risks associated with the international operation of the company

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.

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 

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