The key purpose of this
financial report is to analyse the information provided from an investors point
of view, using the FAME database and offer recommendations about the changes in
Nike’s financial position and performance, as a result will generate accurate
financial and economic data to assist in the companies future growth, maintain
competitive advantage and increase market share. With this in mind, the use of
ratios have been analysed to determine the companies financial performance
compared with previous years accompanied by the benefits and limitations of
their use. More importantly, the report aims to evaluate how well Nike is
performing in the industry in terms of their competitors, as of that will
consider the differences. Moreover, the report identifies how Nike addresses
the various risks and opportunities the company is exposed to.

 

2.0 Business
Review

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This report has analysed
Nike’s financial reports for the year ended 31 May 2016. The analysis of Nike’s
financial performance is based on the companies balance sheet, income and cash
flow statement. Moreover, Nike’s balance sheet provides the investors with a
snapshot of the companies financial position which indicates the value of their
assets, liabilities and equity for the end of the financial year (Brigham &
Ehrrhardt, 2013). Similarly, the income statement shows the investors whether
Nike is delivering its products or services to their customers for more than
the cost they are selling them for (McLaney, 2006: Wilson & Joyce, 2008:
Mckenzie, 2010).

 

 

Nike’s
key financial indicators for the year

 

 

2016

2015

Change

 

 

 

%

Revenue
(Continuing operations)

65,315

63,085

+3.5%

Operating
profit

12,609

11,713

+7.6%

Profit for the year attributable to ordinary owners

10,943

11,494

(4.8)%

Total
equity

45,810

34,021

+34.7%

 

Figure 1: (Fame. 2016).

 

The companies key financials
indicates in the last 12 months to 31st May 2016 revenue increased by 3.5% to
£65,315,000 (2015: 63,085,000) (Fame, 2016).

 

Nevertheless, with the
increase in reimbursement of operating cost combined with the increase in
growth of administrative expense, Nike’s overall commission revenue increased
(Fame, 2016). More importantly, the companies commission revenue increase was
generated by the UK & Ireland marketplace as result experienced high single
digit growth in the current year vs the prior year (Fame, 2016). As the company
operated under an efficient related cost base, with a direct focus on marketing
expenditure, the companies total administrative expenses increased by 2.6% in
the current year (Fame, 2016). Therefore, this positive performance is a
reflection of strong commissions revenues in the current year combined with a
controlled administrative cost base (Fame, 2016). With this in mind, operating
profit increased by 7.6% in the current year to £12,609,000 (2015: £11,713,000)
(Fame, 2016). Moreover due to the increase in tax charges in the current year,
Nikes profit for the year attributed to ordinary owners fell by 4.8% of
£1,257,000 compared to 2015, following a one-off tax adjustments in the prior
year (Fame, 2016).

3.0 Financial
Performance

 

A critical aspect of financial
performance is benchmarking, this enables investors to compare Nike’s current
performance against previous years as well as its competitors (Bendell et al.,
1998: Brooks, 2010). Furthermore, investors can analyse Nike’s financial
performance through a trend analysis over a specific period of time (McGuire et al., 1988; Nissim and Penman, 2001).

 

A trend analysis allows
investors to determine future results, the below trend of income statement
enables investors to review past information on the different period of
Revenue, Operating Profit and Net Income with 2012 as base (Dyson, 2014).
Furthermore, this information assists investors to understand current trends in
the companies accounts by understanding the increase or decrease of Nikes
financial status (Dyson, 2014). 
Therefore, evaluating financial statement over the last five years will
help investors forecast Nikes future trends accurately (Bernstein & Wild,
1993).

 

Nike Trend Analysis

Year

2016

2015

2014

2013

2012

 

 

 

 

 

 

Revenue

65,315,000

63,085,000

65,553,000

75,397,000

78,365,000

 

83.34

80.5

83.65

96.21

100

Operating Profit

12,609,000

11,713,000

10,177,000

8,757,000

8,043,000

 

156.76

145.56

126.5

108.8

100

Net Income

12,061,000

11,310,000

9,013,000

8,139,000

7,788,000

 

148.86

145.22

115.72

104.5

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Own figure 2, data adapted
from: (Fame. 2016).

 

With regards to the above
trend analysis, comparing the value of operating profit and net income has
increased on year to year. Whereas, Nike’s revenue has steadily decreased year
on year however, as previously mentioned in (2.0) Nike’s revenue increased in
2016 due to a high single digit growth which was generated by the UK and
Ireland marketplace (Fame, 2016). More specifically, with the change in trend
of the net income has increased in comparison to the companies revenue which
has been impacted due to an increase in tax charge mentioned in (2.0) (Fame,
2016). 

 

Nevertheless, the key benefits
of constructing a trend analysis allows investors to forecast future events in
order to minimise risk (Bernstein & Wild, 1993; Dyson, 2004). Specifically,
identifying these trends provides investors with valuable and useful
information in order for Nike to react before its competitors as a result with
provide a competitive advantage (McGuire
et al., 1988; Bernstein & Wild, 1993; Nissim and Penman, 2001).

4.0 Key
Ratio’s

 

The main reason organisations
calculate ratio’s is to summarise complex financial accounts into key
indicators for potential investors (Lewellen, 2004: McLaney, 2006). With this
in mind, different investors have different interests in financial information
which provides an indicator of which ratios need to be used (Atrill &
McLaney, 2002). In this case, the objective of this report is to identify the
companies overall performance and level of risk involved in the investment in
comparison to their competitors (Schoenebeck & Holtzman, 2013: Whittington,
2007). Therefore, from an investors point of view profitability, productivity
and liquidity ratios are important in order to generate useful data (Barnes,
1987: Walsh, 2006). 

 

In today’s business
environment the changes in foreign currency rates, liquidity risk, interest
rates risk and competitors expose a variety of financial risks on Nikes
operations (Schoenebeck & Holtzman, 2013). In order to monitor the risks
and limit the adverse impact on the companies financial performance, Nikes
directors work closely with the Nike Group Treasury department (Fame, 2016).
Therefore, the financial directors and the companies strategy are constantly
exposed by the following risks and uncertainties identified in the ratios.
Nevertheless, in this report several key ratio’s are discussed to allow
investors to understand Nikes financial position in terms of productivity with
comparison to its main competitor Adidas, with this in mind measures of
liquidity, profitability, investment and performance are discussed (McLaney,
2009).

Nike’s
Key Financials

 

2016

2015

2014

2013

2012

Turnover

65,315,000

63,085,000

65,553,000

75,397,000

78,365,000

Profit (Loss)
before Taxation

12,016,000

11,310,000

9,013,000

8,139,000

7,788,000

Net Tangible
Assets (Liab.)

66,499,000

57,597,000

47,652,000

53,554,000

49,149,000

Shareholders
Fund

45,710,000

34,021,000

26,536,000

26,549,000

17,861,000

Profit Margin

18.40

17.93

13.75

10.79

9.94

Return on
Shareholders Funds

26.29

33.24

33.97

30.66

43.60

Return on
Capital Employed

18.07

19.64

18.91

15.20

15.84

Liquidity
Ratio (X)

6.09

4.47

2.52

4.88

3.14

Gearing (%)

54.36

85.33

130.55

113.13

213.38

 

 

Adidas Key Financials

 

2016

2015

2014

2013

2012

Turnover

888,171,000

693,359,000

487,475,000

435,034,000

540,716,000

Profit (Loss) before Taxation

28,966,000

22,978,000

15,608,000

16,705,000

19,566,000

Net Tangible Assets (Liab.)

49,059,000

62,353,000

41,269,000

65,014,000

52,469,000

Shareholders Fund

43,356,000

56,290,000

39,000,000

62,211,000

50,030,000

Profit Margin

3.26

3.31

3.20

3.85

3.62

Return on Shareholders Funds

66.81

40.82

26.85

26.85

39.11

Return on Capital Employed

59.04

36.85

37.81

25.69

37.29

Liquidity Ratio (X)

1.09

1.51

1.28

1.67

1.64

Gearing (%)

141.02

11.02

9.12

7.43

27.88

 

Figure 3: (Fame. 2016).

 

As illustrated in the above
table Nike’s net profit margin has increased considerably however, the
companies return on capital has steadily increased throughout the years. More
importantly, it is highlighted that Adidas has a significantly higher turnover than
Nike however, the company has a reasonably low profit margin which indicates a
higher risk that could result in a decline in sales and erase profits (Schoenebeck
& Holtzman, 2013). With this in mind, the information provided is important
to investors as it indicates the percentage of sales after all expenses are
paid, as well as measuring the companies effectiveness (Walsh, 1996: McLaney,
2009: Fame, 2016).

 

With regards to the table,
Nikes effectiveness has decreased in the current year in comparison to the
previous financial year. Whereas, Nike can confidently show investors they’re
of sufficient liquid, as the current ratio has increased dramatically in the
current year. Additionally, Adidas liquidity position is slowly decreasing year
on year with a ratio of 1.09:1 in the current year, only slightly more than one
would expect, therefore would raise concern for potential investors. 

 

However, from an investors
point of view they are significantly concerned about the return on shareholders
funds. Nevertheless, Nike’s return on shareholders funds have increased
dramatically in comparison to the financial year 2012 with a steady increase
year on year, which has a positive impact on investors. Although, Adidas has
higher shareholder funds year on year in comparison to Nike, it is evident that
Adidas shareholder funds  inconsistently
decrease and increase dramatically year on year, as a result provides limited
stability for investors.

 

 

4.1
Profitability

 

It is argued that assessing
return on capital (ROCE) is an important part of an investors analysis of Nikes
operating performance (Keown et al., 2008). Therefore, Nikes profitability is a
key indicator for investors as long as the companies long term profits are used
to pay dividend to the shareholders as well as fund the development of the
business (Altman, 1968: McLaney, 2009). Nevertheless, this ratio indicates that
Nike’s assets performance is significantly healthy providing the company with a
high return. In addition, the above tables indicates that Adidas has a
significantly higher ROCE year on year in comparison with Nike. Although, it is evident that
this ratio is favourable to Adidas due to the company having a higher turnover,
overall Nike’s profit margin is significantly higher therefore Nike’s
performance is considerably more desirable to its investors (Bernstein &
Wild, 1993).

 

According to the ratio, the
company is increasing the money on return for every pound invested as a result
generates more profits (Altman, 1968: Bernstein & Wild, 1993: McLaney,
2009). The increase in ROCE and their profit margin provides Nike with a
competitive advantage and a positive indicator for investors and stakeholders
(Keown et al., 2008). With regards to the ratio, it is important for investors
to see the debt acquired and liabilities assumed in order to base their
evaluation (Altman, 1968: Bernstein & Wild, 1993: McLaney, 2009).  

4.2 Liquidity

 

With regards to the above
table it is evident that Nike’s liquidity position has dramatically increased
in the current year. As measured by the current ratio, it is important for
investors to understand the companies overall performance (Altman, 1968: Lee et
al., 2009). Moreover, Nike’s healthy 6.09:1 in 2016 has significantly increased
in the current year compared to prior years, which is significantly more than
one would expect (Brigham & Houston, 2004). With this in mind, the general
rule of thumb of the value of the current ratio is more than 1:1 means that
Nike has sufficient liquidity assets to cover current liabilities as a result
has positively impacted the companies performance (Keown et al., 2008). In this
case, the ratio illustrates that Nike is sufficient in using their short term
assets and liabilities. Whereas, Nikes competitors, Adidas has considerably low
liquidity position of 1.09:1, making Nike more appealing to its investors
(Bernstein & Wild, 1993: Brigham & Houston, 2004).

 

Similarly, Nike works
in conjunctions with the Nike Group Treasury department, therefore the company
ensures it maintains sufficient funds for on-going operations as well as for
future investments to ensure the company manages its working capital
effectively to reduce liquidity risks (Fame, 2016).

 

 

 

4.3 Gearing

 

As highlighted, Nike has gone
from a considerably high gearing of 213.38 with high long-term borrowings in
2012 to a relatively low gearing of 54.36 in 2016. Whereas, Adidas’s gearing
ratio had dramatically increased from 2012 to 2016. More specifically, the gearing
ratio measures the companies borrowed funds in relations to its equity.
Moreover, a high gearing ratio does not come without risk; excessive debt could
lead to bankruptcy, this situation could be dangerous where a sudden increase
in interest rates will significantly impact a companies repayment (Keown et
al., 2008: Lee et al., 2009). Due to the fluctuation of interest rates this
exposes a risk on the companies overdraft facility, as a result the companies
interest payments are kept to a minimum by closely managing their cash position
(Fame, 2016)

 

Nevertheless, with the
significant decrease in gearing ratio year on year, there is limited concern
for Nikes debt as a result the company has seen a significant increase in ROCE
and year on year. More importantly, investors have limited concern about the
companies gearing ratio, since a reasonably low ratio will require investors to
put less equity in the company. Similarly, with the decrease in gearing
provides Nike with a strong liquidity position.

5.0 Financial
risk management

 

Within today’s competitive
business environment in the athletic and leisure industry,

Nike is exposed to various
risks. According to Aguilar PESTLE analysis
(Appendix 2) a major risk that Nike faces is the constant threat of strong
competition and changes in social trends (Hussain & Mohammed, 2015).
Amongst the competitive nature, Nike is also faced with the advancement of
technological innovation as well as the fluctuation of the economy impacting
Nike and their operations (Brohi, et al., 2016).
The major risks in which the company is exposed to are; intense competition,
market conditions, innovation and technological advancement

5.1 Intense
competition

 

In order to understand the
competitive environment of the athletic and leisure industry from an investor
point of view, Porter’s (1985) forces is a distinct strategy which helps
identify the threat of competition and risk of substitutes in order for Nike to
remain dominant in the market.

 

Nevertheless, in terms of
industry performance, Nike operates in a competitive market, faced with strong
competition such as Adidas (Hussain & Mohammed, 2015: Brohi et al., 2016). However, Nike also
needs to be aware of the threat of new entrants (Hussain & Mohammed, 2015). Therefore
it is important for the company to reduce any revenue risks, by doing so, the
company continues to focus on its strengths such as its strong brand image and
maximise their opportunities by continuing to increase their brand awareness as
well as increasing the drive of consumer demand through appropriate marketing activity
(Fame, 2016). Additionally, the threat of substitutes is moderate, as Nike
maintains a strong position in the market in terms of quality perception, thus
sports enthusiast are loyal to larger brand such a Nike rather than trusting in
other alternatives (Gran, Strohbücker, & Sundvall, 2014).

5.2 Market
Conditions

 

With regards to the UK’s
following decision to leave the EU, potential changes in the current and future
market conditions pose a threat (Fame, 2016). Therefore, as a result of the
decision to leave the EU, Nike continues to monitor these changes as well as
evaluating other areas of the business which could be potentially impacted
(Fame, 2016). In terms of foreign exchange risk the directors do not consider
this constitutes to a significant risk therefore the companies operations could
be potentially impacted, however the impact is considered limited (Fame, 2016).

 

More importantly, with the
change in consumers preferences the UK athletic and leisure industry has seen a
growth by 42% in the last five years, with the increase in trend for fashion
infused sportswear ‘Athleisure’ becoming the biggest source of growth
(Armstrong, 2016). Nevertheless, with the in technological advancement and
exposer of the athletic industry from the 2012 London Olympics has influenced
the UK market to “lace up” (Armstrong, 2016). Moreover, Newbery and Liu, (2017)
argues that the social trends have exploded due to the increase in social media
channels exploiting clean eating. Additionally, in 2016 the ‘athleisure’
reached its peak, researchers have argued that major active and leisurewear
brands such as Nike has seen a rate of growth (Armstrong, 2016: Brohi et al., 2016: Newbery and Liu, 2017).

 

 

 

 

 

 

 

 

 

 

 

 

Figure 4: (Armstrong, 2016).

 

According to the statistics,
research has shown that the changes in consumer preferences, consumers are now
prepared to put ‘athleisure’ into their everyday lifestyles, in which they
wouldn’t dare to do so ten years ago (Newbery & Liu, 2017). More specifically, these
changes provide numerous benefits and opportunities for Nike within the future,
making them more desirable to investors. However, with the changes in consumer
trends, Nike has seen an increase in competitiors from small and large brands.
With this in mind, Nike has two areas of competitive advantage: the resources
to keep up to date with technology and the ability to innovate (Segran, 2017). 

 

5.3 Innovation
and Technological Advancement

 

Moreover, Nike are constantly
evolving and innovating their products to meet the demands of their consumers
and athletes as a result the risk of market erosion is reduced (Fame, 2016).
More importantly, with the increase in brand exposure generated through various
global marketing activities offers significant benefits for the company (Fame,
2016). Nevertheless, Nike constantly develops new products, marketing and
customer service in which addresses the various specific trends within the
market (Segran, 2017). With regards to Nike’s technological
advancements and innovations provides investors with the confidence that Nike
has the ability to constantly generate profits and maintain competitive
advantage.

 

6.0 Conclusion

 

Overall, Nikes maintaining
their financial performance with the increase in revenue and profits, as well
as confidently showing investors they’re of sufficient liquid. Moreover, due to
the changes in social trends, consumers are becoming more health conscious and athleisure
is now in consumers everyday lifestyles, therefore, Nike’s profits will
continue to increase within the coming year. With regards to the industry
performance it is obvious that investing in the active and leisure industry
provides numerous opportunities for investors. Although, the increase in threat
of competition may impact Nike’s profits, it is evident from the competitor
analysis that Nike remains dominant in the market, with the constant
development of technology and the ability to innovate provides Nike with a
competitive advantage.