Nike: Financial Analysis the Relevance of Analyzing

Nike: Financial Analysis

The relevance of analyzing the financial stability and health of an entity cannot be overstated especially when it comes to the determination of the future performance of the concerned entity. This text undertakes an in-depth financial analysis of Nike, a well-known footwear, equipment, and apparel designer.

In seeking to conduct an in-depth analysis of Nike, I will amongst other things describe the company and its operations in significant detail, evaluate its vulnerability to financial threats, identify and discuss its financial trends, and discuss how its stock is likely to perform going forward. It is important to note that as I seek to further evaluate the financial performance of Nike, I will also rope in Skechers USA, Inc. A comparison of the two companies in this analysis will help in determining how well Nike is performing in its industry. A Nike competitor, Skechers happens to be in the same industry as Nike, i.e. The Textile -- Apparel Footwear and Accessories industry.

Nike: Company Overview

From the onset, it is important to note that "Nike, Inc., together with its subsidiaries, engages in the design, development, marketing, and sale of footwear, apparel, equipment, and accessories for men, women, and children worldwide" (Yahoo! Finance, 2013). Founded by Bill Bowerman and Philip Knight, Nike has built a name for itself as a leading and fashionable brand with an almost fanatical customer base from across the world. Using its extensive distribution network, the company presently covers areas as far as Africa and the Middle East. It also avails kit uniforms to athletic teams from all over the world.

Headquartered in Oregon, Nike which employs 44,000 fulltime employees offers its products in several categories - seven to be precise. These categories according to Yahoo! Finance (2013) are "running, basketball, football, mens training, womens training, NIKE sportswear, and action sports." It is however important to note that Nike also has interests in a wide range of other products including but not limited to athletic bags, kids' products, sports accessories and apparel, performance items such as protective equipment, and digital devices, etc. (Yahoo! Finance. 2013). Although the company has in the past made use of various outlets and partnerships to avail its products to customers, advances in technology and more so the growing popularity of ecommerce has seen Nike add internet sales to its sales roster. For this reason, the company according to Yahoo! Finance (2013) offers its products for sale "through its retail stores and internet sales, as well as independent distributors, licensees, and sales representatives." The company mainly targets athletes and urban youth. Nike's current CEO is Mr. Mark G. Parker.

Given that I will also be making use of Skechers USA, Inc. For comparison purposes in this discussion, it would be prudent to make a mention of the company's activities and operations in passing. In basic terms, Skechers USA, Inc. concerns itself with "the design, development, marketing, and distribution of footwear for men, women, and children" (Yahoo! Finance, 2013). Using advertising that is chiefly celebrity-driven, the company's brand image is largely stylish and trendy and for this reason, one could conclude that it mainly targets the urban youth and fashion conscious individuals. As Yahoo! Finance (2013) further points out, the company as of February this year had "116 concept stores, 118 factory outlet stores, and 61 warehouse outlet stores in the United States; and 36 concept stores and 18 factory outlets internationally."

An Evaluation of Nike's Vulnerability to Current Financial Threats

In seeking to evaluate Nike's vulnerability to a recession and higher interest rates, I will look into the entity's ability to not only settle its financial obligations (short-term) but also its long-term solvency. This will largely be possible through the computation of the firm's financial leverage and liquidity ratios.

Table 1

Ratio

Value (2012)

Current Ratio

2.98

Debt Ratio

0.33

Debt-to-Equity Ratio

0.49

A current ratio of 2.98 shows that Nike would not have any difficulty settling its obligations (short-term) should they become due. This is particularly the case given that a current ratio of more than 1 is an indicator that a firm's current assets are sufficient to cover its current or short-term liabilities. Given its high current ration, Nike does not seem to have any current liquidity problems and for this reason, the company is likely to remain solvent during and after the downturn in economic activity/recession.

Next, we have the debt ratio which according to Graham and Smart (2011, p.44) "measures the proportion of total assets financed by the firm's creditors." Thus as the authors further point out, a high debt ratio is often an indicator that a given firm is making use of a significant amount of borrowed cash to fund its activities. In our case, Nike has a debt ratio of 0.33 or 33%. This is an indicator that less than half of Nike's assets have been funded using debt. For this reason, one could say that Nike has a lower proportion of debt relative to its assets and thus its level or risk is low. Given that the company faces minimal risk with regard to debt-load, it is likely that it will navigate the recession quite easily. Further, the prevailing high interest rates are not likely to affect the company adversely. The lower debt ratio in this case also means that the business would find it easier to access additional loans to finance growth and expansion, especially given that lenders are more likely than not to advance loans to businesses whose long-term solvency is not under threat. This easy access to funds also means that Nike has an enhanced ability to withstand global competition as it could easily use the said funds to explore new markets, develop new markets, make the relevant acquisitions, and develop new products to remain relevant in the market.

When it comes to the debt-to-equity ratio, Graham and Smart (2011, p.44) observe that this particular ratio comes in handy in the measurement of a business entity's financial leverage. A debt ratio of 0.49 in our case indicates that Nike's debts (long-term) were 49% as large as the company's shareholder's equity. This is an indicator that the firm has not been very aggressive in funding its operations using debt. In that regard therefore, Nike's earnings are not expected to be volatile as a result of higher interest rates.

It should also be noted that Nike's special focus on the continuous improvement of its products could further enhance its ability to withstand global competition. According to the company's current CEO, Nike is fully committed to innovation (Nike, 2013). As the CEO further points out, it is through this core commitment to innovation that the company hopes to amongst other things continue being a leader in its industry (Nike, 2013).

Financial Performance

In seeking to evaluate the financial performance of Nike, this section will focus on a number of financial ratios including profitability ratios, asset management ratios, and debt ratios. Comparisons will be made between the performance of Nike and another company in the same industry and sector.

Table 2

Ratios

Nike

Skechers

2012

2011

2010

2012

2011

2010

1. Profitability Ratios

Gross Profit Margin

0.43

0.46

0.46

0.44

0.39

0.45

2.

Return on Assets

0.14

0.14

0.13

0.07

0.10

3.

Return on Equity

0.21

0.22

0.20

0.01

0.15

4. Asset Management Ratios

Receivables Turnover

6.79

6.05

6.56

6.30

7.24

6.98

5.

Inventory Turnover

4.08

4.18

5.00

2.59

4.34

2.75

6.

Total Asset Turnover Ratio

1.56

1.39

1.32

1.16

1.25

1.54

Discussion

Using the figures outlined in the table above, it would be possible to not only determine Nike's stability and health but also its projected financial performance. To begin with, it is important to note that over the three-year period, the gross profit margin of Nike has been relatively stable, i.e. It has not significantly fluctuated. This is unlike that of Skechers which experienced a significant dip in 2011. In basic terms, the gross profit margin as Moyer, McGuigan, Rao, and Kretlow (2012) point out seeks to measure the profitability (relative) of the sales of a given business entity after the deduction of costs of sales. For this reason, this ratio according to the authors reveals how efficient the management of a firm is in coming up with pricing decisions and in production costs control. For this reason, an inadequate gross profit margin is an indicator of a firm's inability to settle its operating expenses. In the most recent financial year, Nike's gross profit margin was 0.43. This effectively means that what Nike is left with at the end of the day after deducting COGS-related expenses is $0.43. The gross profit margin in this case is slightly lower than that of Skechers and for this reason, Nike should in future adopt measures aimed at lowering its production costs.

Next, we have the return on assets ratio. In basic terms, this particular ratio seeks to establish how effectively the assets of a given entity are being used in profit generation. For this reason, a high return on assets ratio is always desirable as it essentially indicates that an entity is raking in more profits on less investment. During the most recent financial year, Nike had a ROA of 14%. Skechers on the other hand had a ROA of only 7%. It is clear that in this case, Nike is far much better than Skechers in the conversion of investment to profit. This is also an indicator that Nike also has a superior and more effective managerial team. In comparison to 2010, the company's ROA has also improved within the last two years. It is also important to note that during the most recent financial year, Nike had a higher return on equity ratio than Skechers. As a measure of the profit an entity earns on each dollar invested in its stock, this means that Nike's shareholders were better-off than those of Skechers which had a return on equity of only 0.10 against that of Nike which was 0.21. Unlike that of Skechers, the ROE of Nike has also been on the increase over the three-year period (see table 2). We could therefore hypothesize that Nike's profitability is largely impressive in relation to that of its competitors (herein represented by Skechers). This is an indication that Nike is likely to continue producing market beating returns for its stockholders going forward.

Next, when it comes to the receivables turnover ratio, Stickney, Weil, Schipper, and Francis (2010) note that this particular ratio comes in handy in the determination of how swift a firm is in the collection of cash. A high ratio is thus desirable to a low ratio largely because the latter implies that an entity is inefficient in its collection of accounts receivables. During the most recent financial year, Skechers has a lower receivables turnover ratio than Nike. This is an indication of Nike's efficiency when it comes to the collection of accounts receivables. Looking at the ratio during the previous year, i.e. 2011, it is clear that Nike undertook to enhance its credit policies to ensure that imparted credit was collected on a timely basis. Next, the inventory turnover ratio according to Graham and Smart (2011, p.42) "provides a measure of how quickly a firm sells its goods." For this reason, a low inventory turnover ratio is an indication of poor sales. During the most recent financial year, the inventory turnover ratio of Nike was 4.08 while that of Skechers was 2.59. In comparison to Skechers therefore, Nike appears to be having stronger sales. Should this trend continue into the future, Nike will most likely continue to rake in higher returns for its shareholders.