Financial Position of Nike in 2012 and 2013 - Essay Example

? and Section # of Word Count 575 words (excluding The report will analyzethe financial position of Nike in 2012 and 2013. It will calculate the required ratios, examine the trends and then investigate upon the reasons behind such trend. The 2012 financial results will then be compared with 2012 financial results of Adidas – Nike’s arch competitor around the globe. LIQUIDITY ANALYSIS The liquidity analysis measures the ability of the company to meet its short term obligations as and when they become due. These financial metrics point to the safety for the creditors and long-term loaners of the company; hence a low ratio becomes a point of concern for the stakeholders. The improvement in the current ratio as well as the quick ratio indicates that the company is now in a better position to pay its term obligations. This improvement is largely due to increase in the current assets especially cash and equivalents, and short term investments. Nike held $3.47 in 2013 as compared to $3.05 in 2012 for every $1 of short term liabilities as shown in appendix. Likewise, the company’s current ratio is almost at par with the industry average. Similarly, the company has seen a drastic improvement in the quick ratio in 2013 as compared to 2012. Nike held $2.31 in 2013 as compared to $1.93 in 2012 for every $1 of short term liabilities as shown in appendix. Compared to the industry average, the company leads the market with a high ratio. The improvement is again associated to the large investments in cash as well as marketable securities. The inventories, prepaid and deferred taxes only saw slight increments. Therefore, the liquidity analysis shows that Nike is in a better position to handle any unexpected current liabilities and contingencies in 2013 as compared to 2012, and compared to its industry rivals. PROFITABILITY ANALYSIS Nike’s revenues grew by 11% in 2013. These revenues grew in almost every part of the world except China; whereas North America saw the highest growth in revenues from the geographical point of view. The gross margin evaluates the efficiency and the productivity of the company’s assets and management in reducing the direct costs of the company. It is an important financial metric from an investor’s point of view. The company’s gross margin improved by 10 basis points in 2013 as shown in appendix; however, this improvement was due to higher net selling prices rather than the efficiency and effectiveness of the management and assets. At the same time, the company saw an increase in the labor costs associated with Nike product making which decreased the gross margins. Nike contributed 43.6c in 2013 and 43.5c in 2012 to the gross profit for every $1 sale made by the company as shown in appendix. Compared to the industry average, Nike has a better margin and is one of leaders of the industry. The net margin measures the ability of the company to control its indirect expenses associated with the company’s working. Nike saw an improved net margin in 2013 when it increased by 30 basis points as shown in appendix. However, the increment could have been much higher; but the company was unable to manage its increments in costs. The selling and administrative expenses increased by 10% in 2013 due to increase in personnel costs and advertising expense during the Olympics. Nike contributed 9.8c in 2013 as compared to 9.5c in 2012 to the net profit for every $1 sale that is made by the company as shown in appendix. Compared to industry average, the company has a moderate net margin and needs to improve in the coming years. However, the quality of the income was not favorable in 2013. The increment was mainly due to increase in the net selling prices of the Nike products all over the world. The return on equity, an important metric from an investor’s point of view, measures the return earned by the owners of the company. The company’s return on equity increased by 90 basis points in 2013 due to an increase in the net income. The increase, however, is offset to a certain extent by an increase in the shareholders’ equity by 7.5% in 2013. Nike led the industry with a return of 22.3c to the owners for every $1 invested in the company in 2013 as compared to 21.4cin 2012 as shown in appendix. The return on asset, another important metric from the investors’ point of view, measures the return earned by both the owners as well as creditors of the company. It assesses the efficient usage of the money by the management. The company’s return fell by 30 basis points in 2013 as shown in appendix. The total assets of the company increased by 14.5% - Nike saw a huge investment in cash and equivalents as well as short term investments – a non-profitable investment. Therefore, despite an increase in the net income, the company saw a fall in the return on assets. Nike provided a return of 14.1c in 2013 and 14.4c in 2012 for every $1 invested into the company as shown in appendix. EFFICIENCY ANALYSIS The receivable turnover and the days’ sales outstanding measure the competence of the collections of the company and their credit policy. Nike saw improvement in its collection cycle 2013. The company collected its receivables in 45 days in 2013 as compared to 49 days in 2012 as shown in appendix. The inventory turnover and the days’ inventory outstanding measure the competence of the company in its inventory management. Nike saw a slightly deterioration in its metric in 2013. The company sold its average inventory in 85 days in 2013 compared to 82 days in 2012 as shown in appendix. This shows that the inefficiency of the company’s management in handling its inventory. The total asset turnover, an imperative financial metric, measures the ability of the company in the usage of its assets. The company was able to maintain its efficient usage of the assets in 2013 as compared to 2012. Nike generated $1.53 in sales for every $1 invested in the assets of the company in both the financial years as shown in appendix. However, the ratio was maintained due to increase in the net selling prices, and questions the efficiency of the management. GEARING ANALYSIS The gearing analysis assesses the amount of the company financed the debt – short term as well as long term. It also assesses the financial risk of the company. Nike debt to equity ratio raised drastically in 2013. The company had raise 58c in 2013 as compared to 49c in 2012 for every $1 invested by the owners as shown in appendix. Similarly, the debt to total assets ratio also worsened in 2013. The worsening is largely due to heavy increase in the long term debt of the company by 431%. The company issue two corporate bonds- one maturing in 10 years and the other maturing in 30 years. The company has a good reputation; hence, this will not pose as a serious financial risk. MARKET TEST The earnings per share points to the income earned on each issued share of the company. Nike improved its earnings profile in 2013. Each share of the company earned $2.75 in 2013 as compared to 42.47 in 2012 as shown in appendix. At the same time, the company improved its price earning multiple; the investors are ready to pay a higher price for each dollar earning of the company. The investors were willing to pay $28 in 2013 as compared to $20 in 2012 for $1 of Nike’s earnings as shown in appendix. COMPARISON ANALYSIS WITH ADIDAS Nike has a better liquid position as compared to Adidas. Nike has a better current ratio, a better quick ratio and has higher net working capital. Nike held $3.05 of current assets, while Adidas held $1.57 of current assets, for $1 of current liabilities. Similarly, Adidas has a poor quick ratio which indicates possible difficulty in paying unexpected short term obligations. Nike held onto a greater number of sales as compared to Adidas. Nike managed to have better profit margins and final returns to the stakeholders as compared to its arch rival. Adidas, despite having a higher gross margin, was unable to achieve a comparable net margin. Nike contributed 9.5c to the net profit as compared to 3.5c for every $1 sale that is made by the respective companies as shown in appendix. Likewise, Nike provided better returns to the stakeholders as compared to Adidas. Nike provided a return of 21c on equity and 14c on assets; whereas Adidas provided a return of 10c and 5c respectively as shown in appendix. Adidas has a better credit policy as compared to Nike and is able to collect its receivables in 40 days; whereas Nike takes 49 days to collect its receivables. However, Nike has a better overall efficiency rate. Nike generated $1.50 in sales for every $1 invested in the company’s assets; whereas Adidas generated $1.30 for the same investment as shown in appendix. This indicates to the better usage of the assets by the management at Nike. Nike has better leverage position as compared to the arch rival. Adidas raised $1.20 in debt for every $1 in equity, whereas Nike raised only $0.49 in debt for the same equity investment as shown in appendix. This shows the higher financial risk associated with Adidas. CONCLUSION Nike improved its financial position in 2013 as compared to 2012. The company improved its liquidity position, became more efficient in the usage of assets and resources, and increased its margins and returns to the stakeholders. However, the company became financially leveraged in 2013 with the issuance of new corporate bonds. Compared to Adidas, Nike is a better investment because of its improved margins, returns, better liquidity and less leverage. BIBLIOGRAPHY Businessweek. 2013. NIKE INC -CL B (NKE:New York): Financial Ratios. [online] Available at: http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=NKE [Accessed: 15 Nov 2013]. Businessweek.com. 2013. ADIDAS AG (ADS:Xetra): Stock Quote & Company Profile - Businessweek. [online] Available at: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=ADS:GR [Accessed: 15 Nov 2013]. MSNMoney. 2013. Nike Inc Cl B on MSN Money. [online] Available at: http://investing.money.msn.com/investments/stock-price?symbol=NKE [Accessed: 15 Nov 2013]. Nike Inc. 2013. NIKE, Inc. - Investor Relations - Investors - Financial Reports & Filings - Annual Reports. [online] Available at: http://investors.nikeinc.com/Investors/Financial-Reports-and-Filings/Annual-Reports/default.aspx [Accessed: 15 Nov 2013]. APPENDIX Liquidity Analysis Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets – Pre-paid – Deferred tax – Inventory) / Current Liabilities 2013 2012 Liquidity Ratios Current Ratio 3.47 3.05 Quick Ratio 2.31 1.93 Net Working Capital (mn $) 9,700 7,963 Profitability Analysis Gross Profit Margin = (Gross Profit / Sales) * 100 Net Profit Margin = (Net Profit / Sales) * 100 ROE = (Net Profit / Total Equity) * 100 ROA = (Net Profit / Total Assets) * 100   2013 2012 Profitability Ratios Gross Profit Margin 43.6% 43.5% Net Profit Margin 9.8% 9.5% Return on Equity 22.3% 21.4% Return on Assets 14.1% 14.4% Quality of Income 2,485 2,223 Efficiency Analysis Account Receivable Turnover = Sales / Average Receivables DSO = 365 / Account Receivable Turnover Inventory Turnover = COGS / Average Inventory DIO = 365 / Inventory Turnover TAT = Sales / Total Assets   2013 2012 Efficiency Ratios Account Receivable Turnover 8.10 7.44 Days Sales Outstanding (days) 45.05 49.05 Inventory Turnover 4.29 4.44 Days Inventory Turnover (days) 85.07 82.19 Total Asset Turnover 1.53 1.53 Gearing Analysis Debt to Equity = Total Debt / Total Equity Debt to Assets = Total Debt / Total Assets   2013 2012 Gearing Ratios Debt to Equity 0.58 0.49 Debt to Total Assets 0.37 0.33 Market Test P/E multiple = Current Price per share / EPS   2013 2012 Market Test EPS 2.75 2.47 P/E ratio 28.44 19.91 Competitor Analysis Nike Adidas Liquidity Ratios Current Ratio 3.05 1.57 Quick Ratio 1.93 0.99 Net Working Capital (mn $) 7963 2503 Profitability Ratios Gross Profit Margin 43.5% 47.7% Net Profit Margin 9.5% 3.5% Return on Equity 21.4% 9.9% Return on Assets 14.4% 4.5% Efficiency Ratios Account Receivable Turnover 7.4 9.1 Days Sales Outstanding (days) 49.0 40.3 Inventory Turnover 4.4 3.1 Days Inventory Turnover (days) 82.2 117.0 Total Asset Turnover 1.5 1.3 Gearing Ratios Debt to Equity 0.49 1.20 Debt to Total Assets 0.33 0.56 Extracts from Nike Financial Statements Income Statement Extract 2013 2012 Sales 25,313 23,331 COGS 14,279 13,183 Gross Profit 11,034 10,148 Net Income 2,485 2,223 Balance Sheet Extract 2013 2012 2011 Inventory 3,434 3,222 2,715 Account Receivable 3,117 3,132 3,138 Pre paid 802 857 Deferred tax 308 262 . Current Assets 13,626 11,845 Total Assets 17,584 15,465 14,998 Total Debt 6,428 5,084 Total Equity 11,156 10,381 Read More