NIKE INC.

FINANCIAL ANALYSIS 1

Nike Inc. Financial Analysis

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Institutional affiliation
NIKE INC. FINANCIAL ANALYSIS 2

Overview of the Company

Nike Inc. is one of the American multinational and leading companies specializing in the

manufacture and selling of sportswear and is headquartered in Beaverton, Oregon. The company

was founded in 1964 and was then known as Blue Ribbon before renamed Nike Inc. in 1978.

The company was founded by Bill Bowerman, who was a track and field coach together with his

former student at the University of Oregon. Nike Inc. went public in 1980, and at the beginning

of the 21st century, the company had retail shops and distributors in more than 170 countries

across the world. By this time, the company had been known worldwide for the manufacture and

selling of sportswear.

In the past three years, the financial performance for Nike Inc. indicates that the revenue

for 2018 was $ 36 billion and increased to $ 39 billion as of the 2019 financial year. In the 2020

financial year, the company’s revenue dropped to $ 37 billion. It might be due to the emergence

and the spread of coronavirus disease. The net income for the same company also increased from

$ 1.9 billion to $ 4 billion before dropping to $ 2.5 billion in the 2018, 2019, and 2020 financial

year. The report discusses the financial analysis as of the 2020 financial year[ CITATION Nik20 \l

1033 ].

Financial Ratios

One can only understand the important financial information of a given business firm

through the computation and the interpretation of the financial ratios. This section computes the

major financial ratios and explains what the resulting number implies to the business firm's

financial health. The report's conclusion will focus on what most of the financial ratios mean and

how is the company's overall financial health[ CITATION Pam15 \l 1033 ].

NIKE INC. FINANCIAL ANALYSIS 3

Profitability Ratios

The profitability ratios form one of the categories of the financial ratios employed by the

business analysts while determining the financial status of a given firm. These ratios are usually

used by the financial analysts and the investors while assessing the ability of the business firm

ability to generate the net income relative to the revenue realized by the business firm, the assets

owned by the business firm, the operation cost incurred by the company and the shareholder’s

equity over a given financial period.

Profitability Ratios 2020 2019 Variance (%)

Gross Margin(%) 43.42 44.67 -2.8%
Net profit (%) 6.79 10.3 -34.1%

a) Gross Profit Margin

The gross profit margin of a given company is computed as the gross profit ratio to the

revenue realized by the business firm in a given financial period[ CITATION Joh151 \l 1033 ].

From the summary calculations in the table above, one can note that there was a decrease in

the portion of revenue used to pay off the cost of goods between the two financial years.

b) Net Profit Margin

The net income of the business firm is the ratio of the net income to the revenue realized

by a given business firm in a specified financial period. The business firms usually use the

net profit margin while assessing the profitability of the business firm when all expenses and

costs have been taken into account[CITATION MTa89 \l 1033 ]. The net profit margin in a given

financial year is computed with the following formula;

NIKE INC. FINANCIAL ANALYSIS 4

Net profit Margin = Net Income/ Revenue

The summary calculations in the table above show that the net profit for 2020 decreased

by 34.1% from the 2019 financial year. A drop in the net profit realized by the business firm

can be attributed to the emergence and the spread of the coronavirus disease, which

interrupted normal business operations. It had a huge impact on most business firms' net

profits, including Nike Inc.

Liquidity Ratios

The liquidity ratios of a given business firm are essential in determining its ability to pay off the

current debt obligations without the need to raise the external capital[ CITATION Ale12 \l 1033 ].

The liquidity ratios for Nike Inc. for the two financial years were computed and summarized as

follows;

Liquidity Ratios 2020 2019 Variance (%)

Current Ratio 2.14 2.1 1.9%
Quick Ratio 1.59 1.58 0.6%

a) Current Ratio

The current ratio of the business firm is used by the financial analysts and investors while

assessing the ability of the business firm to pay off its current liabilities with the available current

assets. The current ratio greater than one is usually indicated as recommended as the best

ratio[ CITATION Joh151 \l 1033 ]. The ratio is computed as the ratio of the current assets to the

current liabilities.

CR = Current Assets/ Current Liabilities

NIKE INC. FINANCIAL ANALYSIS 5

As per the calculations indicated above, the current ratios for the two financial years were greater

than one, which shows that Nike Inc. has sufficient current assets to pay off the current debt

obligations. Business firm also improved the current ratio for the company between the two

financial years.

b) Quick Ratio

The quick ratio also is one of the liquidity ratios used while assessing the ability of the

business firm to pay off the current debt obligations with the most liquid assets[ CITATION Yux14 \l

1033 ]. The quick ratio is computed with the following formulae;

QR = (Current Assets – Inventory)/ Current Liabilities

As per the computation of the quick ratio, I obtained the ratio as 1.59 and 1.58 for the two

financial years. A ratio greater than one shows that the company has more liquid assets than the

company's current liabilities. A quick ratio greater than one usually indicates that the business

firm has sufficient liquid assets to pay off the current debt obligations. The quick ratio of a given

business firm is used while determining the immediate liquidity of the business firm.

Solvency Ratios and the Capital Structure

The capital structure of the business firms constitutes the equity and debts used to finance

the business operations of the business firm. The ratios between the two give the proportion of

the debts and equities used to fund the business operations.

A solvency ratio is a group of financial ratios used while determining its ability to pay off the

long-term debt obligations. These ratios are usually used by the financial institutions which lend

loans to the different business firms[ CITATION Ale12 \l 1033 ]. The solvency ratios of the business
NIKE INC. FINANCIAL ANALYSIS 6

firms while determining if the cash flows of the business firm are sufficient to cover the

company's long-term liabilities.

Solvency Ratios 2020 2019 Variance (%)

Asset to Debt 0.27 0.25 8.0%
Debt to Equity 1.2 0.38 215.8%

Debt to Asset Ratio

The debt to assets ratio is one of the solvency ratios that computes the amount of debt to

the company's total assets in a given financial period. The higher the debt to asset ratio in a given

financial period, the higher the degree of the financial stability of a given company[ CITATION

Mic12 \l 1033 ]. The debt to assets ratio of a given company is usually compared with the average

of the whole market. The debt to asset ratio of a given company is computed as follows;

Debt to assets ratio = (short-term + long-term debt)/ Total Assets

The obtained financial ratios show that the business firm had improved its financial stability over

the two financial years by 8%. Even though 2020 was one of the financial years the various

business was struggling to keep their businesses on their feet, Nike Inc. improved its financial

stability. The debt to assets ratio determines the ability of the same business firm to secure from

the various financial institutions.

c) Debt to Equity Ratio

The debt to equity ratio is one of the solvency ratios where the debt of a given company is

expressed as a percentage of the shareholder’s equity of the company. The ratio is computed as

follows;
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Debt to Equity Ratio = Total Debt/ Total Shareholder’s Equity

I obtained the debt to equity ratio for Nike Inc. as 1.2 and 0.38 for the 2020 and 2019 financial

years. It implies that this company relied more on debt to finance their business operations than

equity financing in 2020. Over the two financial years, the company changed its financing

strategy from equity in 2019 to debt financing in 2020.

Market Value Ratios

The market value ratios are the financial metrics that are usually employed by the

business firms while assessing and evaluating the current stock prices of the companies traded

publicly. The market value ratios for the company were computed and summarized in the table

below.

Market Value Ratios 2020 2019 Variance (%)

PE 32.7 32.5 0.6%
Book Value Per Share 5.17 5.76 -10.2%

a) Price to Earnings Ratio

The price-to-earnings ratio is one of the market value ratios usually employed by financial

analysts and investors while assessing the market value of the company stocks. The price-to-

earnings ratio of the stocks indicates whether they have been undervalued or overvalued. If the

prices to earnings ratio are higher than what the market can offer, it implies that the stocks of the

company under study has been overvalued. At the same time, if this ratio is also lower than the

market, then it also implies that the stocks are undervalued[ CITATION Ale12 \l 1033 ].
NIKE INC. FINANCIAL ANALYSIS 8

The price-to-earnings ratio for 2020 is higher than that of the 2019 financial year. It implies that

the stocks in 2020 were highly valued as compared to the 2019 fiscal year.

b) Book Value Per Share

The book value per share of a given company is computed as the number of shares available

to the common shareholders and dividing it with the total outstanding number of shares. The

book value per share for a given company is used by the business firms while assessing whether

the stocks of a given firm have been overvalued or undervalued compared to that of the market.

The book value per share for Nike was computed and found as 5.17 in 2020 and 5.76 in 2019 ,

while that for the LSE was 6.0 in the 2020 and 2019 financial year. It implies that the stock for

Nike is undervalued as compared to the market.

Efficiency Ratios

The efficiency ratios of the business firm are used in the assessment of the business

firm’s ability to manage its liabilities due within a financial year[CITATION MTa89 \l 1033 ]. The

efficiency ratios are known in measuring the time that the income is generated from a given

business's clients. The computation results for these ratios are summarized as indicated below.

Efficiency Ratios 2020 2019 Variance (%)

Inventory- Turn Over 2.87 3.85 -25.5%
Asset Turn Over 1.19 1.65 -27.9%

Inventory Turn- Over Ratio

The inventory turnover of a given company is one of the efficiency ratios that explains

how the business firm manages its inventory while providing insights regarding the revenue
NIKE INC. FINANCIAL ANALYSIS 9

generated by the business firm[ CITATION Mic12 \l 1033 ]. The financial metric explains the

number of times the inventory has been sold over a given financial period.

It implies that the company takes an average of 4 days to sell the inventories in 2019 and 3 days

in 2020. It is an improvement to the business operations of Nike Inc.

Asset Turn – Over Ratio

The asset turnover ratio is one of the efficiency ratios employed by the business firms

while determining their assets in the generation of the revenues in a given financial year. This

ratio computes the sales made by the business firm as a percentage of the assets owned by a

given business firm[ CITATION Ale12 \l 1033 ]. The higher value of the asset turn ratio indicates

that, the management of a given firm is efficiently utilizing its assets in generating revenues to

the company. The asset turnover ratio = total sales/total assets.

As per the computation results of the asset turnover ratio, one can note that Nike Inc.'s sales are

more than the asset owned by the same company. It indicates that the company is efficiently

utilizing its assets to generate revenue for the business firm. If the ratio was less than one, for

instance, the company could have been underutilizing its assets to generate revenue.

Conclusion

As per the calculations discussed above, one can note that Nike Inc. the liquidity ratios

are very high and satisfactory, and recommendable. Both current and quick ratios are greater

than one, which shows that this company maintained the highest level of liquidity in the 2020

financial year.
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Secondly, the market value ratios of the company are higher than that of the market and hence it

shows that, the business firm is overvalued and in that case the firm is suitable for a sell in the

stock market where it is traded in. The computation of the efficiency ratios shows that; the

company's management is effective in employing the assets while generating their revenues. The

inventory turnover shows that, the company also takes only 5 days while selling its inventories

from their business firm. It is the shortest time that the company can take in selling its

inventories. Over the same financial year, the company realized a substantial profit percentage

despite the emergence and the spread of coronavirus disease.

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References

Nike Inc. (2020). 2020 Annual Report. Oregon: Nike Inc.

Peterson, P. P., & Fabozzi, F. J. (2015). Capital budgeting: theory and practice. New York, NY:

Wiley.

Salek, J. G. (2015). Accounts receivable management best practices. Hoboken, N.J.: John Wiley

& Sons.

Tadman, M. (2013). Speculators and slaves: masters, traders, and slaves in the old South

Madison. The University of Wisconsin.

Taillard, M. (2012). Corporate finance for dummies. Hoboken, N.J.: Wiley.

Tracy, A. (2012). Ratio Analysis Fundamentals. Oxford: Springer.

Yan, Y. (2014). Python for Finance. Packt Publishing.

Appendix
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