The key purpose of thisfinancial report is to analyse the information provided from an investors pointof view, using the FAME database and offer recommendations about the changes inNike’s financial position and performance, as a result will generate accuratefinancial and economic data to assist in the companies future growth, maintaincompetitive advantage and increase market share.
With this in mind, the use ofratios have been analysed to determine the companies financial performancecompared with previous years accompanied by the benefits and limitations oftheir use. More importantly, the report aims to evaluate how well Nike isperforming in the industry in terms of their competitors, as of that willconsider the differences. Moreover, the report identifies how Nike addressesthe various risks and opportunities the company is exposed to. 2.0 BusinessReview This report has analysedNike’s financial reports for the year ended 31 May 2016. The analysis of Nike’sfinancial performance is based on the companies balance sheet, income and cashflow statement.
Moreover, Nike’s balance sheet provides the investors with asnapshot of the companies financial position which indicates the value of theirassets, liabilities and equity for the end of the financial year (Brigham &Ehrrhardt, 2013). Similarly, the income statement shows the investors whetherNike is delivering its products or services to their customers for more thanthe 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 financialsindicates 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 theincrease in reimbursement of operating cost combined with the increase ingrowth of administrative expense, Nike’s overall commission revenue increased(Fame, 2016). More importantly, the companies commission revenue increase wasgenerated by the UK & Ireland marketplace as result experienced high singledigit growth in the current year vs the prior year (Fame, 2016). As the companyoperated under an efficient related cost base, with a direct focus on marketingexpenditure, the companies total administrative expenses increased by 2.
6% inthe current year (Fame, 2016). Therefore, this positive performance is areflection of strong commissions revenues in the current year combined with acontrolled administrative cost base (Fame, 2016). With this in mind, operatingprofit 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 prioryear (Fame, 2016). 3.0 FinancialPerformance A critical aspect of financialperformance is benchmarking, this enables investors to compare Nike’s currentperformance against previous years as well as its competitors (Bendell et al.
,1998: Brooks, 2010). Furthermore, investors can analyse Nike’s financialperformance through a trend analysis over a specific period of time (McGuire et al., 1988; Nissim and Penman, 2001). A trend analysis allowsinvestors to determine future results, the below trend of income statementenables investors to review past information on the different period ofRevenue, Operating Profit and Net Income with 2012 as base (Dyson, 2014).Furthermore, this information assists investors to understand current trends inthe companies accounts by understanding the increase or decrease of Nikesfinancial status (Dyson, 2014). Therefore, evaluating financial statement over the last five years willhelp 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 adaptedfrom: (Fame. 2016).
With regards to the abovetrend analysis, comparing the value of operating profit and net income hasincreased on year to year. Whereas, Nike’s revenue has steadily decreased yearon year however, as previously mentioned in (2.0) Nike’s revenue increased in2016 due to a high single digit growth which was generated by the UK andIreland marketplace (Fame, 2016). More specifically, with the change in trendof the net income has increased in comparison to the companies revenue whichhas been impacted due to an increase in tax charge mentioned in (2.0) (Fame,2016). Nevertheless, the key benefitsof constructing a trend analysis allows investors to forecast future events inorder to minimise risk (Bernstein & Wild, 1993; Dyson, 2004).
Specifically,identifying these trends provides investors with valuable and usefulinformation in order for Nike to react before its competitors as a result withprovide a competitive advantage (McGuireet al., 1988; Bernstein & Wild, 1993; Nissim and Penman, 2001). 4.0 KeyRatio’s The main reason organisationscalculate ratio’s is to summarise complex financial accounts into keyindicators for potential investors (Lewellen, 2004: McLaney, 2006). With thisin mind, different investors have different interests in financial informationwhich provides an indicator of which ratios need to be used (Atrill &McLaney, 2002).
In this case, the objective of this report is to identify thecompanies overall performance and level of risk involved in the investment incomparison to their competitors (Schoenebeck & Holtzman, 2013: Whittington,2007). Therefore, from an investors point of view profitability, productivityand liquidity ratios are important in order to generate useful data (Barnes,1987: Walsh, 2006). In today’s businessenvironment the changes in foreign currency rates, liquidity risk, interestrates risk and competitors expose a variety of financial risks on Nikesoperations (Schoenebeck & Holtzman, 2013). In order to monitor the risksand limit the adverse impact on the companies financial performance, Nikesdirectors work closely with the Nike Group Treasury department (Fame, 2016).Therefore, the financial directors and the companies strategy are constantlyexposed by the following risks and uncertainties identified in the ratios.
Nevertheless, in this report several key ratio’s are discussed to allowinvestors to understand Nikes financial position in terms of productivity withcomparison to its main competitor Adidas, with this in mind measures ofliquidity, 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 abovetable Nike’s net profit margin has increased considerably however, thecompanies return on capital has steadily increased throughout the years. Moreimportantly, it is highlighted that Adidas has a significantly higher turnover thanNike however, the company has a reasonably low profit margin which indicates ahigher risk that could result in a decline in sales and erase profits (Schoenebeck& Holtzman, 2013). With this in mind, the information provided is importantto investors as it indicates the percentage of sales after all expenses arepaid, 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 theprevious financial year. Whereas, Nike can confidently show investors they’reof sufficient liquid, as the current ratio has increased dramatically in thecurrent year. Additionally, Adidas liquidity position is slowly decreasing yearon year with a ratio of 1.09:1 in the current year, only slightly more than onewould expect, therefore would raise concern for potential investors. However, from an investorspoint of view they are significantly concerned about the return on shareholdersfunds.
Nevertheless, Nike’s return on shareholders funds have increaseddramatically in comparison to the financial year 2012 with a steady increaseyear on year, which has a positive impact on investors. Although, Adidas hashigher shareholder funds year on year in comparison to Nike, it is evident thatAdidas shareholder funds inconsistentlydecrease and increase dramatically year on year, as a result provides limitedstability for investors. 4.1Profitability It is argued that assessingreturn on capital (ROCE) is an important part of an investors analysis of Nikesoperating performance (Keown et al.
, 2008). Therefore, Nikes profitability is akey indicator for investors as long as the companies long term profits are usedto pay dividend to the shareholders as well as fund the development of thebusiness (Altman, 1968: McLaney, 2009). Nevertheless, this ratio indicates thatNike’s assets performance is significantly healthy providing the company with ahigh return. In addition, the above tables indicates that Adidas has asignificantly higher ROCE year on year in comparison with Nike. Although, it is evident thatthis ratio is favourable to Adidas due to the company having a higher turnover,overall Nike’s profit margin is significantly higher therefore Nike’sperformance is considerably more desirable to its investors (Bernstein , 1993). According to the ratio, thecompany is increasing the money on return for every pound invested as a resultgenerates more profits (Altman, 1968: Bernstein & Wild, 1993: McLaney,2009).
The increase in ROCE and their profit margin provides Nike with acompetitive advantage and a positive indicator for investors and stakeholders(Keown et al., 2008). With regards to the ratio, it is important for investorsto see the debt acquired and liabilities assumed in order to base theirevaluation (Altman, 1968: Bernstein & Wild, 1993: McLaney, 2009). 4.2 Liquidity With regards to the abovetable it is evident that Nike’s liquidity position has dramatically increasedin the current year. As measured by the current ratio, it is important forinvestors to understand the companies overall performance (Altman, 1968: Lee etal., 2009).
Moreover, Nike’s healthy 6.09:1 in 2016 has significantly increasedin the current year compared to prior years, which is significantly more thanone would expect (Brigham & Houston, 2004). With this in mind, the generalrule of thumb of the value of the current ratio is more than 1:1 means thatNike has sufficient liquidity assets to cover current liabilities as a resulthas positively impacted the companies performance (Keown et al.
, 2008). In thiscase, the ratio illustrates that Nike is sufficient in using their short termassets and liabilities. Whereas, Nikes competitors, Adidas has considerably lowliquidity position of 1.09:1, making Nike more appealing to its investors(Bernstein & Wild, 1993: Brigham & Houston, 2004). Similarly, Nike worksin conjunctions with the Nike Group Treasury department, therefore the companyensures it maintains sufficient funds for on-going operations as well as forfuture investments to ensure the company manages its working capitaleffectively to reduce liquidity risks (Fame, 2016). 4.
3 Gearing As highlighted, Nike has gonefrom a considerably high gearing of 213.38 with high long-term borrowings in2012 to a relatively low gearing of 54.36 in 2016. Whereas, Adidas’s gearingratio had dramatically increased from 2012 to 2016.
More specifically, the gearingratio measures the companies borrowed funds in relations to its equity.Moreover, a high gearing ratio does not come without risk; excessive debt couldlead to bankruptcy, this situation could be dangerous where a sudden increasein interest rates will significantly impact a companies repayment (Keown etal., 2008: Lee et al., 2009). Due to the fluctuation of interest rates thisexposes a risk on the companies overdraft facility, as a result the companiesinterest payments are kept to a minimum by closely managing their cash position(Fame, 2016) Nevertheless, with thesignificant decrease in gearing ratio year on year, there is limited concernfor Nikes debt as a result the company has seen a significant increase in ROCEand year on year. More importantly, investors have limited concern about thecompanies gearing ratio, since a reasonably low ratio will require investors toput less equity in the company.
Similarly, with the decrease in gearingprovides Nike with a strong liquidity position. 5.0 Financialrisk management Within today’s competitivebusiness environment in the athletic and leisure industry,Nike is exposed to variousrisks. According to Aguilar PESTLE analysis(Appendix 2) a major risk that Nike faces is the constant threat of strongcompetition and changes in social trends (Hussain & Mohammed, 2015).Amongst the competitive nature, Nike is also faced with the advancement oftechnological innovation as well as the fluctuation of the economy impactingNike 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 Intensecompetition In order to understand thecompetitive environment of the athletic and leisure industry from an investorpoint of view, Porter’s (1985) forces is a distinct strategy which helpsidentify the threat of competition and risk of substitutes in order for Nike toremain dominant in the market.
Nevertheless, in terms ofindustry performance, Nike operates in a competitive market, faced with strongcompetition such as Adidas (Hussain & Mohammed, 2015: Brohi et al., 2016). However, Nike alsoneeds to be aware of the threat of new entrants (Hussain & Mohammed, 2015). Thereforeit is important for the company to reduce any revenue risks, by doing so, thecompany continues to focus on its strengths such as its strong brand image andmaximise their opportunities by continuing to increase their brand awareness aswell as increasing the drive of consumer demand through appropriate marketing activity(Fame, 2016). Additionally, the threat of substitutes is moderate, as Nikemaintains a strong position in the market in terms of quality perception, thussports enthusiast are loyal to larger brand such a Nike rather than trusting inother alternatives (Gran, Strohbücker, & Sundvall, 2014).5.2 MarketConditions With regards to the UK’sfollowing decision to leave the EU, potential changes in the current and futuremarket conditions pose a threat (Fame, 2016).
Therefore, as a result of thedecision to leave the EU, Nike continues to monitor these changes as well asevaluating other areas of the business which could be potentially impacted(Fame, 2016). In terms of foreign exchange risk the directors do not considerthis constitutes to a significant risk therefore the companies operations couldbe potentially impacted, however the impact is considered limited (Fame, 2016). More importantly, with thechange in consumers preferences the UK athletic and leisure industry has seen agrowth by 42% in the last five years, with the increase in trend for fashioninfused sportswear ‘Athleisure’ becoming the biggest source of growth(Armstrong, 2016). Nevertheless, with the in technological advancement andexposer of the athletic industry from the 2012 London Olympics has influencedthe 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 mediachannels exploiting clean eating. Additionally, in 2016 the ‘athleisure’reached its peak, researchers have argued that major active and leisurewearbrands 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 nowprepared to put ‘athleisure’ into their everyday lifestyles, in which theywouldn’t dare to do so ten years ago (Newbery & Liu, 2017). More specifically, thesechanges provide numerous benefits and opportunities for Nike within the future,making them more desirable to investors. However, with the changes in consumertrends, Nike has seen an increase in competitiors from small and large brands.
With this in mind, Nike has two areas of competitive advantage: the resourcesto keep up to date with technology and the ability to innovate (Segran, 2017). 5.3 Innovationand Technological Advancement Moreover, Nike are constantlyevolving and innovating their products to meet the demands of their consumersand athletes as a result the risk of market erosion is reduced (Fame, 2016).More importantly, with the increase in brand exposure generated through variousglobal marketing activities offers significant benefits for the company (Fame,2016). Nevertheless, Nike constantly develops new products, marketing andcustomer service in which addresses the various specific trends within themarket (Segran, 2017). With regards to Nike’s technologicaladvancements and innovations provides investors with the confidence that Nikehas the ability to constantly generate profits and maintain competitiveadvantage.
6.0 Conclusion Overall, Nikes maintainingtheir financial performance with the increase in revenue and profits, as wellas confidently showing investors they’re of sufficient liquid. Moreover, due tothe changes in social trends, consumers are becoming more health conscious and athleisureis now in consumers everyday lifestyles, therefore, Nike’s profits willcontinue to increase within the coming year.
With regards to the industryperformance it is obvious that investing in the active and leisure industryprovides numerous opportunities for investors. Although, the increase in threatof competition may impact Nike’s profits, it is evident from the competitoranalysis that Nike remains dominant in the market, with the constantdevelopment of technology and the ability to innovate provides Nike with acompetitive advantage.