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Nike - Financial Ratio Analysis

Essay by review  •  February 26, 2011  •  Case Study  •  2,366 Words (10 Pages)  •  12,144 Views

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Nike, Inc. Financial Ratio Analysis

In assessing the significance of various financial data, experts engage in financial analysis, the process of determining and evaluating financial ratios. A ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other financial information. Since compared with industry data, ratios help an individual understand a company's performance relative to that of competitors, and used to trace performance over time (Venture Line, 2005). The following analysis is for Nike, Inc.

Nike, Inc. is engaged in the design, development and worldwide marketing of footwear, apparel, equipment and accessory products. The Company sells its products to retail accounts and through a mix of independent distributors, licensees and subsidiaries in over 120 countries around the world. Nike's athletic footwear products are designed primarily for specific athletic use, although some of its products are worn for casual or leisure purposes. The Company creates designs for men, women and children. Running, basketball, children's, cross-training and women's shoes are the Company's top-selling product categories. Nike also markets shoes designed for outdoor activities, tennis, golf, soccer, baseball, football, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking and other athletic and recreational uses (Yahoo Finance, 2005).

Financial analysis can reveal much about a company and its operations. However, there are a few points to keep in mind about ratios. First, a ratio is a "flag" indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of a company's management and economic circumstances, financial analysis can tell much about a corporation. Second, there is no single correct value for a ratio. Values of a particular ratio that are too high, too low, or just right depends on the perspective of the analyst, and on the company's competitive strategy.

In trend analysis, financial ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point out a need for action. Trend analysis works best with five years of ratios. The following is a five-year trend table for Nike, Inc.

Five-Year Trend Table of Financial Ratios

As Provided by Mergent Online

Ratio 2004 2003 2002 2001 2000 Industry Avg

Return on Equity (%) 19.78 18.55 17.41 16.88 18.47 13.70

Return on Assets (%) 11.98 11.02 10.37 10.13 9.89 7.90

Return on Investment 215.27 162.30 168.59 223.41 203.80 11.50

Gross Margin 0.04 0.04 0.04 0.04 0.04 0.04

EBITDA of Revenue (%) 14.70 14.10 13.59 12.94 13.44 -

Operating Margin (%) 12.65 11.65 10.79 10.69 10.95 12.23

Pre-Tax Margin 11.83 10.50 10.28 9.71 10.22 9.40

Net Profit Margin (%) 7.72 4.43 6.70 6.21 6.44 6.10

Effective Tax Rate (%) 34.79 34.10 34.31 36.00 37.00 31.90

Quick Ratio 1.75 1.44 1.37 1.14 0.90 1.50

Current Ratio 2.74 2.32 2.26 2.03 1.68 2.50

Total Debt to Equity 0.14 0.19 0.18 0.13 0.17 0.17

Long Term Debt to Assets 0.09 0.08 0.10 0.07 0.08 0.13

Interest Coverage 59.00 27.18 22.37 16.70 21.43 16.00

(Industry averages not available from Mergent. Collected from Kiplinger and Reuters.)

Financial ratios are meaningful only when compared with some standard, such as an industry trend, ratio trend, a trend for the specific company analyzed, or a stated management objective. For this reason, a description of each ratio follows.

Return on equity (ROE) determines the rate of return on your investment in the business. As an owner or shareholder this is one of the most important ratios, as it shows the hard fact about the business -- are you making enough of a profit to compensate you for the risk of being in business? One should compare the return on equity to other investment alternatives, such as a savings account, stock or bond.

Return on assets (ROA) considers a measure of how effectively assets are used to generate a return. This ratio is not very useful for most businesses. ROA shows the amount of income for every dollar tied up in assets. Year to year trends may be an indicator, but one must watch out for changes in the total asset figure as you depreciate your assets. A decrease or increase in the denominator can affect the ratio and does not necessarily mean the business is improving or declining.

Return on investments (ROI) compares net profits before tax and shareholders equity. ROI provides a standard return on investor's equity, and is a key ratio for investors. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROI is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management.

Gross margin is the indicator of how much profit is earned on your products without consideration of selling and administration costs. This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available to pay the overhead expenses of the company. Companies should compare its ratios to those of similar businesses, which will reveal any relative strengths or weaknesses.

Earnings before interest, taxes, depreciation and amortization (EBITDA) are calculated by taking operating income and adding back to it interest, depreciation and amortization expenses. EBITDA can be used to analyze the profitability between companies and industries. Because it eliminates the effects of financing

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