Financial Ratios

Published: 2021-10-07 13:40:12
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This report highlights the comprehensive financial analysis of the three well known sports brands across the world. These companies have their fair share in the dominance of selling sports goods like shoes, Tracks, t-shirts etc and this report will offer an insight of the Sports goods industry to the person who reads.
The ratio examination of the companies and the industry averages enables the reader to make key comparisons and to determine the debt utilization, asset utilization, profitability as well as the liquidity of the company. Additionally the four year horizontal and trend analysis provides financial insights of the company and helps to know the future aspects of the 3 sports goods companies. Degree of Operating and Financial leverage has also been calculated which helps to know the change in earnings before income and taxes of the company and proportion of debt in the capital structure of the company.
The project also includes certain analysis between the 3 companies which throws light on the areas which require improvement in each of the companies and which will further help to improve the efficiency of the companies. On the basis of calculation and analysis, the reader will be able to conclude as to where the improvement is required by the firm in order to raise its profitability. And which of three companies is having an upper hand among each other. NIKE Inc. Nike is one of the leading sports goods company over wide in world.
It’s a US based company established in 1964. Nike originally known as “ Blue Ribbon Sports “ was founded by Philip knight- a track athlete from a University of Oregon and his coach Bill Bowerman. Initially Nike was one of the distributor of Japanese shoe maker company Onitsuka Tiger. The company showed a remarkable profit in its market and they quickly launched their first BRS retail store in 1966 located on Pico Boulevard in Santa Monica, California. The relation between BRS and Onitsuka was on ending terms and this made BRS to launch their own line of footwear in 1971.
Carolyn Davidson designed ‘Swoosh’ which was their first newly brand entered in the market and it was registered with the ‘U. S. Patent and Trademark Office on January 22, 1974. Nike the name came into existence when they sold their design to a soccer shoe named ‘Nike’ which was released in 1971. Design, development and worldwide marketing of the apparels, footwear and other accessories is the principle business activity of Nike. Nike sells their products to their owned retail stores with mix of distributors who have the license. Nike overall has 170 retail stores spread across the world.
Virtually all the footwear and apparel products are manufactured outside United States, whereas other equipment are produced both in US and abroad. Even though Nike have had various bad phases regarding the working condition and human rights dilemma in china and India, Inspite of that its considered one of the leading sports brand across the world. It’s a company that began with a humble origin from selling footwear in basement to becoming the behemoth in the athletic industry. Managers for Nike are creating value for shareholders by expanding Nike operations in foreign markets as much as possible.
Nike’s sales and earnings outpaced Wall Street estimates FY 06. Nike’s sales reached $15 billion and its earnings per share were up 18%. Over the past 5 years, Nike’s earnings per share on compounded rate were up 20%, gross margins averaged 42% and in the past year, Nike delivered 44% margins in a period of rising costs. The current managers are maximizing shareholder’s wealth but in the footwear industry, Nike’s performance still falls. The footwear industry averaged about 14. 25%, while Nike’s growth in stock was 10. 48%. If the increase in value of shares is a benchmark of performance for managers, Nike’s performance is unimpressive.
The brand itself is considered the biggest strength of Nike. Nike earns more revenues from its international operations than its domestic market. Nike earned about $6. 5 billion FY 2005 from its international operations, compared to $5. 1 billion from its domestic market. International operations appear to be a key driver of Nike’s growth. The picture below illustrates Nikes price trend for the last five years. PUMA Puma AG Rudolf Dassler Sport, formally branded as Puma, is a major German national company that produces high-end athletic shoes, lifestyle footwear and other sportswear.
Formed in 1924 as Gebruder Dassler Schuhfabrik by Adolf and Rudolf Dassler, relationships between the two brothers deteriorated until the two agreed to split in 1948, forming two separate entities, Adidas and Puma. PUMA is one of the world’s leading sportslifestyle companies that develop and designs footwear apparel and accessories. The Puma group owns brands Puma, golf and tretorn. The company, which was founded in 1948 distribute its products to more than 120 countries around the globe. The registered office of the company is in Herzogenaurach, Germany and it employs more than 9500 people worldwide.
The puma share is listed for official trading on the Frankfurt and Munich stock exchanges. It is trading in the prime standard segment and the mid-cap Index Mdax of the german stock exchange. The main shareholders of the company as in 2010 were the PPR Group holding almost about 71. 58% shares and the rest of the shares are free flowed. The chairman of the company Mr Jochen Zeitz has recently decided to transform Puma AG into European Corporation- Puma SE. Puma’s main market is in the sales of footwear as we look upon the sales of 2010  | Consolidated Sales| in % of Consolidated Sales| Footwear:| € 1,424. million| 52. 6 %| Apparel:| € 941. 3 million| 34. 8 %| Accessories:| € 340. 3 million| 12. 6 %| | | € 2,706. 4 million| 100 %|
The graph below shows the fluctuations in share price for puma for the last 5 years. Puma AG’s 2007 revenue totalled €2. 74 billion, which was essentially flat from 2006’s revenue of €2. 76 billion. However, this slight (0. 6%) drop can be attributed to foreign currencies weakening against the euro. Other than that small drop in 2007, Puma’s sales have increased every year since 1993, when revenues totalled €541. 3 million. As Puma’s sales have grown, so have its expenses.
Expenses for marketing and retail, which totalled €272 million in 2005, came to about €420 million in both 2006 and 2007. Overall operating expenses increased by nearly 50% between 2005 and 2006, causing Puma’s net income for 2006 to fall 8% despite a 15% increase in revenue. ADIDAS Adidas AG is a German sports apparel manufacturer and parent company of the Adidas Group, which consists of the Reebok sportswear company, golf company (including Ashworth), and Rockport. Besides sports footwear, the company also produces other products such as bags, shirts, watches, eyewear and other sports and clothing-related goods.
The company is the largest sportswear manufacturer in Europe and the second biggest sportswear manufacturer in the world, after its American rival Nike. Adidas was founded in 1948 by Adolf “Adi” Dassler, following the split of Gebruder Dassler Schuhfabrik between him and his older brother, Rudolf. Rudolf later established Puma, which was the early rival of Adidas. Registered in 1949, Adidas is currently based in Herzogenaurach, Germany, along with Puma. The company’s clothing and shoe designs typically feature three parallel bars, and the same motif is incorporated into Adidas’s current official logo.
The “Three Stripes” were bought from the Finnish sport company Karhu Sports in the 1951. The company revenue for 2009 was listed at €10. 38 billion and the 2008 figure at €10. 80 billion. FINANCIAL RATIOS: Financial Ratios is proved to be a powerful tool which could determine what the organisation is going through that is profit or loss in sense it determines the organisations efficiency. This tool is useful for managers, shareholders and creditors who invest depending upon the ratios they would decide whether to invest in this company or not.
With the help of financial ratios we could compare with other companies annual report and our past and present reports too. This helps us to determine the companies’ strength and weakness and hence accordingly we could find out the remedy measures for it so that could organisation could yield a better profit in nearby future. Liquidity of an ongoing business is determined by the financial ratios. It suggests whether the profits we earned is sufficient for the assets we built and determine whether these assets are built by creating a debt or through shareholders equity.
It also determines whether the shareowners are getting the required returns on the investment they make in the organisation. Financial ratios can be classified as follows: * Profitability Ratios * Asset Utilisation Ratios * Liquidity Ratios * Debt Utilisation Ratios Profitability Ratios: Profitability Ratios determine the organisations profit or loss. It helps us to measure return on assets and stockholder’s equity. Profitability Ratios can further be classified as: * Profit Margin = Net Income / Sales * Return on Assets = Net Income/Sales ? Sales/ Total Assets * Return on Equity = Net Income / Shareholders Equity
Profit Margin: | 2007| 2008| 2009| 2010| NIKE| 9. 14%| 10. 11%| 9. 65%| 10. 14%| PUMA| 11. 44%| 9. 17%| 5. 11%| 7. 4%| ADIDAS| 5. 38%| 5. 96%| 2. 36%| 4. 73%| The profit margin of Nike Company could be seen as follows. It is observed that the organisation maintains a stable profit margin near about nine to ten percent. The total sales of the organisation went low as compared to 2007, 2008 sales with 2009, 2010 and hence the net income was low. When considering Puma it have hade a fluctuating profit margin and it was not able to maintain a stable profit margin as Adidas or Nike.
But in the beginning year 2007 Puma had the highest margin of 11. 44 but in the coming years it was subjected to greater fluctuation Return on Assets: The optimum utilisation of assets such as plant, equipment and other resources of the organisation are portrayed by determining the return on assets. | 2007| 2008| 2009| 2010| NIKE| 13. 95%| 14. 73%| 6. 65%| 7. 02%| PUMA| 14. 58%| 12. 19%| 6. 24%| 8. 54%| ADIDAS| 6. 66%| 6. 75%| 2. 76%| 5. 34%| Nike’s trend of generating return on assets goes on increasing from 2007 till 2008 but it showed a decline in the following year that is 2009.
In this respective year the net income was too low as compared to other years and hence the return on assets percentage was low. After 2009, Nike grew their income and hence in 2010 they regained their position and hence their return on assets was maintained little higher than 2009 but was low than 2007 and 2008. Puma was highest return on assets in 2007 considering the other two companies but as Nike puma’s value also declined. Adidas was able to maintain a stable return as it maintains a low level between 7% and 6% Return on Equity :
Return on equity measures whether the shareholders are receiving or making a sufficient earning for the investment they make. The return on equity measured is given as follows. | 2007| 2008| 2009| 2010| NIKE| 21. 23%| 23. 43%| 9. 63%| 10. 21%| PUMA| 23. 51%| 19. 67%| 10. 13%| 14. 58%| ADIDAS| 18. 36%| 19. 01%| 6. 5%| 12. 30%| Nike makes a good return on equity till 2008. In the following years 2009 and 2010 the returns decreased tremendously by 10% since the net income generated in the following years was too low compared to previous years and hence the return on equity was quite low that maintained 9. 3% in 2009 and 10. 21% in 2010. As Nike, Puma and Adidas also had an excellent 2007 and 2008 but in 2009 it decreased drastically. Adidas had to face the worst fall as it had to face a fall from 19. 01% to 6. 5%. Asset Utilisation Ratios: Asset utilisation ratios give a proper conclusion about how efficiently the organisation is maintained. Factors such as firm’s accounts receivables, inventory and assets are given a proper consideration while measuring these ratios. It serves as a benchmark for the organisation in which decisions can be made about the company’s operational issues.
The following ratios come under asset utilisation: * Receivable Turnover = Sales(credit) / Accounts Receivable * Average Collection Period = Accounts Receivable / Average Daily Credit Sales * Inventory Turnover = Sales / Inventory * Fixed Asset Turnover = Sales / Fixed Assets * Total Asset Turnover = Sales / Total Assets Receivable Turnover: The receivable turnover of the organisation is as follows: | 2007| 2008| 2009| 2010| NIKE| 6. 5| 6. 7| 3. 4| 3. 6| PUMA| 6. 09| 6. 36| 6. 18| 6. 05| ADIDAS| 7. 05| 6. 64| 7. 264| 7. 19|
It is observed that the receivable turnover of Nike Company is maintained till 2008 while it went on declining till 2010. It maintained a ratio of 6. 5 and 6. 7 in 2007 and 2008 while it drooped down to 3. 4 and 3. 6 in 2009 and 2010. Adidas received a slightly high and stable turnover considering the other two companies, the lowest receivable turnover faced by Adidas was in the year 2008 but still it maintained a higher turnover than Nike or Puma for that year. Average Collection Period: | 2007| 2008| 2009| 2010| NIKE| 55 days| 54 days| 106 days| 100 days| PUMA| 59 days| 57 days| 58. 4 days| 59 days| ADIDAS| 51 days| 54 days| 50 days| 50 days| The average collection period suggests the average number of days in which accounts receivable are collected.
From the table we come to know about the facts that the company’s average collection period was of 55 and 54 days in 2007 and 2008 while in 2009 and 2010 the accounts were received at an average of 106 and 100 days. Nike took more days taking into account all the five year than Puma or Adidas to collect their accounts receivables. Adidas has maintained a steady rather a strict policy to get the receivables before 55 days. This reveals that stockholders should invest on Nike shares, which in turn will produce higher return to the stock holders in due course of time.

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