Nike Company is a cooperation founded by Phil Knight and Bill Bowerman in the year 1962. Ali Mahdi et al. (2015) indicates that the goal of the company is to produce and distribute Japanese athletic shoes and sell them to the American consumers with an aim of getting rid of the Germany denomination available within the domestic industry. However, currently, the company has widened its product line as it not only focuses on the sale of the Japanese shoes to the American market but it has expanded its operability to global markets (“NIKE, Inc. SWOT Analysis.” 2015). Furthermore, it is also prevalent that the approximately 40% of the company’s sales originates from the company’s sports apparel, subsidiary ventures and sports equipment.
Levin and Behrens (2003) states that the company utilizes both traditional and non-traditional channels of distribution to its global market composed of over 100 countries with its main target market being, Asia Pacific, Europe, United States, and the Americas. Furthermore, the company utilizes more than 20,000 retailers, store, factory stores and internet-based platforms for the sale of its commodities to the potential customers across the globe. Prevalently, Nike is considered as the major player in the sportswear industry with a global market share of approximately 33%. Majorly, the company’s success is accrued to its footwear lines, aggressive marketing and innovative products. As a result, the success of the implemented strategies and techniques are reflected in the company’s financial performance. For instance, in 2009 alone, the company generated approximately $8.8 billion in revenues (Lashinsky, 2015). Reebok and Adidas are some of the major competitors to Nike.
Liquidity ratios are used in measuring the ability of a firm to meet its short-term goals. Looking into Nike’s case, it is evident that the company has short-term obligations that can be ascertained by looking into the company’s current ratio, cash ratio and quick ratio. Current ratio figures arrive at based on Nike’s current assets divided by its current liability. Looking at the company’s financial statements, it is evident that the company’s current ratio recorded a drop in between 2013 and 2014. Similarly, the company’s current ratio declined in between 2014 and 2015. Evidently, during the financial year ending May 31, 2015, the company’s current ratio was recorded at 2.52. During the same period in 2014, Nike’s current ratio was recorded at 2.72. While that of 2013 was 3.47.
According to Asiri (2015), quick ratio refers to the total of the company’s receivables, short-term marketable investments and cash figure. Looking at Nike annual reports, it is prevalent that the company’s quick ratio declined in between 2013 and 2014. Similarly, the company recorded a drop in its quick ratio figures from 2014 to 2015. As presented in the company’s annual report, it is evident that in May 31st, 2015, the company’s quick ratio was estimated at 1.47 while in 2014, the figures were estimated at 1.71. In 2013, Nike’s quick ratio was estimated at 2.31. Cash ratio is also used in determining the company’s liquidity. According to Wong and Joshi (2015), cash ratio is arrived at by adding the company’s cash and short-term marketable investments. Nike Company recorded a decline in its level of cash ratio as well. The company’s cash ratio experienced a decline from 2013 to 2015. The decline in evident in the company’s financial figures based on the fact that in May 31st, 2015, the company’s cash ratio was recorded as 0.94 while in 2014, the company’s cash ratio figures were recorded as 1.02 while in 2013 the figures were estimated 1.52. In comparison to Adidas, it is prevalent that the company’s current ratio is estimated at 1.68, quick ratio 1.10, and cash ratio, 0.46 for the 2015 financial year. This shows that Nike is in the front row to meet its short-term goals compared to the competitor.
Žager, Sačer and Dečman (2012) indicates that the measure of profitability is the firm’s capacity to make profitable sales from the company’s assets. The main ratio used in analyzing the company’s profitability includes gross profit margin, net profit margin, operating profit margin, return on assets and return on equity. Nike’s profit margin is an indication of the company’s revenue percentage to cover its operation expenses as well as other expenditures arising during its day-to-day operations. As presented in the company’s annual report, it is evident that the company’s profit margin recorded an increase in between the 2013 and 2014 financial year as well as between 2014 and 2015. On May 31, 2015, the company recorded a gross profit margin of 45.97%. In the 2014 financial year, the company recorded a gross profit margin of 44.77% while in 2013, 43.59%.
Jiang and Lee (2012) operating profit margin refers to a profitability ratio reached by dividing the company’s operating income by its revenue. An improvement has been noted on the company’s gross profit from 2013 from 2015. In 2015, the company’s operating profit margin was recorded as 13.64% while in 2014 Nike’s profit margin was 13.24%. The recorded value in 2014 was an increase from the 2013 financial year recorded at 12.86%. Net profit margin is also a financial ratio used in determining a company’s profitability. The ratio is obtained by ascertaining a company’s net income dividend over the firm’s revenue. Drawing from Nike’s financial statement, the company’s net profit margin has been increasing steadily since 2013. During the close of the May financial year in 2013, the company’s Net profit margin was recorded at 9.82% while in 2014 the figure was 9.69%. In May 2015, the value of the company was recorded at 10.70%.
Return on investment also plays an important role in identifying a company’s profitability. The figure is arrived at by dividing the company’s net income by the equity of the company’s shareholders. Nike’s return on investment has been rising steadily since the close of the 2013 financial year. Prevalently, the company annual income statement indicates that in 2013, the company’s return on investment was estimated at 22.28% while in 2014 the value was estimated at 24.88% and 25.76% in 2015. In addition, the company’s return on assets shows the level of Nike’s profitability. Nike’s return on assets depicts the company’s profitability by dividing the company’s net income by the value of the company’s total assets. Similar to other profitability ratios, Nike’s profitability return on investment has been increasing steadily since 2013. In 2013, Nike ROA was 14.13% while in 2014 14.48%. Finally in 2015, the company’s return on investment was recorded at 15.15%. Adidas’ gross profit margin is estimated at 45.48 while it’s operating profit margin 5.70% and net margin 3.84%. The figures put Nike to be at the lead as the company’s profitability is higher than that of the competitor. Looking at Nike’s operating activity, it is a fact that the company’s average inventory processing has been deteriorating since the close of the 2014 financial year.
A company’s debt is arrived at by calculating the company’s solvency ratio. Debt to equity, debt to capital and interest coverage is the major financial ratios determining the company’s ability to debt or ability to meet its long term obligations. The estimated figures of Nike’s debt to equity ratio declined from the year 2013 to 2014 and later improved from 2014 to 2015 recording a value higher than that of 2013. Incidentally, in 2013, the company’s debt to equity was recorded at 0.12 and 0.13 in 2014. In 2015, the recorded debt to equity figure was 0.10. The decline was also noted on the company’s debt to capital ratio with the value being estimated at 0.11, 0.11, and 0.09 in 2013, 2014, and 2015 respectively. Nike’s ratio on interest rate coverage declined from 2013 to 2014. The figure further improved in 2015 however the arrived at figure did not reach that of the 2013 figure. In 31st May 2013, the figure was recorded at 143.26 and 94.26 in 2014. In 2015, the figure was estimated at 124.68. From the ratios, it is evident that a general decline has been noted on the company’s total debt in the past three years from 1,388 in 2013 to 1,260 in 2015. For 2015, Adidas’ debt to equity was estimated at 33.46 while the debt to capital was estimated at 25.07. This shows that Nike is not much into debt as its competitor.
Net present value plays an important role in capital budgeting as a way of analyzing the profitability linked to a project investment. In the case of Nike, it is evident that the company needs to widen its product line to generate more sales against the competitors. Nike’s Weighted Average cost of capital is 6.42%. The company generates excess returns proving a bright future regarding an increased growth in sales.
To improve the company’s future performance, Nike’s management should increase its product line with an aim of intensifying its competition. Widening its product line is beneficial for the company’s future growth as the customers will have an ability to obtain all the athlete sports attire from the company other than from the competitors hence increasing its profitability. In addition, the company should consider reducing its product prices to have a stronger competitive edge. The strategy will not only foresee an increase in the number of the company’s consumer base but also increased sales in the future.
Ali Mahdi, H. A., Abbas, M., Mazar, T. I., & George, S. (2015). A Comparative Analysis of Strategies and Business Models of Nike, Inc. and Adidas Group with special reference to Competitive Advantage in the context of a Dynamic and Competitive Environment. International Journal of Business Management & Economic Research, 6(3), 167-177.
Asiri, B. K. (2015). How Investors Perceive Financial Ratios at Different Growth Opportunities and Financial Leverages. Journal Of Business Studies Quarterly, 6(3), 1-12.
Jiang, X., & Lee, B. S. (2012). Do Decomposed Financial Ratios Predict Stock Returns and Fundamentals Better?. Financial Review,47(3), 531-564. doi:10.1111/j.1540-6288.2012.00339.x
Lashinsky, A. (2015). Nike’s Master Craftsman. (cover story). Fortune, 172(7), 94-102.
Levin, L. A., & Behrens, S. J. (2003). From Swoosh to Swoon: Linguistic Analysis of Nike’s Changing Image. Business Communication Quarterly, 66(3), 52-65.
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Wong, K., & Joshi, M. (2015). The Impact of Lease Capitalization on Financial Statements and Key Ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), 27-44.
Žager, K., Sačer, I. M., & Dečman, N. (2012). Financial ratios as an evaluation instrument of business quality in small and medium-sized enterprises. International Journal Of Management Cases, 14(4), 373-385.