Nike's Current Ratio Slightly Improved, Indicating Higher

¶ … Nike's current ratio slightly improved, indicating higher liquidity and an improvement in its ability to meet short-term debt obligations. This did not reflect an increase in inventory, because the company's Quick ratio grew by approximately the same percent. Quick Nike's Quick ratio improved by approximately 3.5%, indicating an improvement in the company's cash position or a decrease in its short-term debt obligations. This might have a lot to do with the fact that Nike derives a significant portion of its income from international sales.

Because its revenues are denominated in dollars, money in cash and short-term instruments may have increased in value if they are held overseas in non-dollar currencies. According to Nike's 10-k SEC filing, "Our largest international region, Europe, Middle East and Africa (EMEA), reported 20% revenue growth in fiscal 2003 compared to fiscal 2002. This growth reflected a 15 percentage point improvement due to changes in currency exchange rates." Revenues in North America were slightly lower despite record revenues worldwide.

3.Inventory Turnover 90.89-83.51 This means that Nike's inventory was in its possession an average of seven and a half days more, or a little over a week. Nike has cause to take note of this, as its inventory takes an entire quarter to be delivered after it is produced. Because Nike manufactures footwear and clothing in Asia and ships it worldwide, this may reflect the time it takes to ship footwear to other countries, notably Europe and the Middle East. Again, higher European sales volumes disproportionately affected sales this year.

A low inventory turnover usually reflects a low cost of goods sold in relation to inventory or a high inventory in relation to CGS. 4.Average Collection Period 71.69-66.57 This is perhaps the most eyebrow-raising ratio; it indicates that the average time that companies took to pay Nike increased by five days to over 10 weeks. This could indicate higher accounts receivable or lower sales. Nike should take steps to encourage companies to pay more promptly as receivable are much lower than this for most companies.

Nike also faces exposure to currency fluctuations when Accounts Receivable or inventory is larger. Even when it is protected by hedges, the company must buy options and suffers from currency fluctuations. 5.Average Payment Period 34.36-30.26 Nike took slightly more than a month, on average, to pay for its obligations. This is probably a bad idea, as the cost of borrowing often increases along a non-linear amount and borrowing for slightly more than thirty days may incur penalties associated with prolonging payments past the customary 30-day growth period.

6.Debt 41% 40% The debt ratio increased slightly, reflecting either a decrease in the value of total assets or an increase in the value of debt. This can have one of several meanings. An increase in reliance on debt often indicates a favorable debt market. Lower interest rates over the past year have made debt-financing more attractive for firms with real assets. Because debt obligations only rose by one percent, we can assume that they are dollar-denominated and don't reflect higher debt levels in Europe, the Middle East or Asia.

Higher debt obligations probably indicate that the projects that Nike is currently engaged in have convinced management to increase financing. According to Nike regarding its debt, "Under these committed credit facilities, we have agreed to various covenants. These covenants include limits on our disposal of fixed assets and the amount of debt secured by liens we may incur, and set a minimum ratio of net worth to indebtedness.

In the event we were to have any borrowings outstanding under these facilities, failed to meet any covenant, and were unable to obtain a waiver from a majority of the banks, any borrowings would become immediately due and payable. As of May 31, 2003, we were in full compliance with each of these covenants and believe it is unlikely we will fail to meet any of these covenants in the foreseeable future." Nike borrows in two currencies: the Yen and the Dollar.

Although Nike can borrow at a lower rate in Japan, this is offset by the cost of debt instruments and reflects the 'Fisher Effect' caused by the 6-month forward rate. The company's information regarding these forward debt obligations: Derivatives used by the Company to hedge foreign currency exchange risks are forward exchange contracts, options and cross-currency swaps. These instruments protect against the risk that the eventual net cash inflows and outflows from foreign currency denominated transactions will be adversely affected by changes in exchange rates.

The cross-currency swaps are used to hedge foreign currency denominated payments related to intercompany loan agreements. Hedged transactions are denominated primarily in European currencies, Japanese yen, Canadian dollars, Korean won, Mexican pesos, and Australian dollars. The Company hedges up to 100% of anticipated exposures typically twelve months in advance but has hedged as much as 32 months in advance. When intercompany loans are hedged, it is typically for their expected duration." 7.Times Interest Earned 26.18-21.37 From this we can gather that despite increased debt financing, Nike has not over-stretched its borrowing limits.

With before-tax revenues, Nike may pay its interest obligations 26 times over, up nearly 5 from last year. Again, this reflects extremely low interest rates and a favorable rating on most of the debt that Nike has issued. However, because re-financing is often continuous, Nike may still want to think twice about expanding its borrowing. In Nike's own words, "If our long-term debt rating were to decline, the facility fees and interest rates under our committed credit facilities would increase.

Conversely, if our long-term debt rating were to improve, the facility fees and interest rates would decrease. Changes in our long-term debt rating would not trigger acceleration of maturity of any then outstanding borrowings or any future borrowings under the committed credit facilities." 8.Gross Profit Margin 41% 39% Gross profits slightly expanded this quarter, reflecting higher sales in relation to the cost of goods sold. What this means is that Nike's variable costs decreased slightly. This may reflect the development of new production efficiencies.

9.Earnings per Share $2.81 $2.51 Earnings per share increased significantly, indicating earnings that are better than those the company experienced last year. This is a popular statistic, but changes in accounting standards can.