Critical Analysis of Nike’s Finances
Nike Company takes financial analysis seriously. Consequently financial reporting has formed part of their business model. So that they are able to monitor their performance in the market as well as make informed decisions going forward which would propel them to greater heights (Nike Inc.). The company has invested heavily in financial analysts who are tasked with handling the company’s financial issues and analyses to ensure that the performance is monitored as well as advising management on the process they need to follow to ensure the company is successful.
Nike began as Blue Ribbon Sports and was founded in January 1964 by Phil Knight an athlete and his coach Bill Bowerman. It began as a distributor of Japanese shoe maker Onitsuka Tiger. The company has acquired several footwear and apparel companies such as Cole Haan in 1988, Bauer Hockey in 1994 and Umbro in 2008 among others (Nike Inc.). The company however sold some of these subsidiaries in order to refocus on the shoe business.
The company is publicly traded under NKE and shares can be bought by the public. The company sells various products both shoes and apparels (Nike Inc.). These are for sport activities such as football, running, basketball, cross training and shoes for outdoor activities such as tennis, skateboarding and golf. Nike has also teamed up with other companies such as Apple Inc, to produce the Nike+ a product that monitor’s an athelete’s performance through a radio device in their shoe which links to an iPod nano.
Due to the company’s excellent performance in production of apparels and foot wear, the company has become a force to reckon with in the market. As a result of this, the company has achieved exemplary financial performance. To remain at the top of their game, the company has had to keep in mind several financial issues before reaching a certain decision that affects their shareholders as well their financial operations.
Profitability ratios of Nike Inc.
2017 2016 2015 2014
Return on Equity (ROE) 34.17% 30.67% 25.76% 24.88%
Return on Assets (ROA) 18.23% 17.57% 15.15% 14.48%
Net Profit Margins
12.34%
11.61%
10.71%
9.69%
The Return in Equity (ROE) is a profitability ratio used to measure the capability of a company to generate profits from the investments of their shareholders. It indicates how each share invested generates its equity (Market Watch). Furthermore, it is an indicator of how management is effective in using equity to finance operations as well as grow the company. Nike’s ROE experienced growth between 2014 and 2017. From 24.88% to 34.17%. The ratios indicate that the company has been profitable over the period in relation to the investments made by the company’s shareholders.
Return on Assets (ROA) is a ratio that enables a company and shareholders determine how a company utilizes its assets. It is a ratio of the of net income after tax deductions to the company’s total assets. The ratio measures how a company is utilizing its assets to produce profits (Market Watch). This ratio helps investors to make informed decisions on which companies to invest their money. Nike’s ROA has been rising over the years from 14.48% in 2014 to 18.23% in 2017. The increasing ROA of Nike suggests that the profitability levels of the company and its opportunities to invest are increasing.
Net Profit Margins refers to the percentage of revenue that remains after all operation expenditure, taxes, interests and stock dividends are deducted from a company’s total revenue. Nike’s NPM have risen from 9.69% in 2014 to 12.34% in 2017 (Market Watch). The trend suggests that there were more conversions of revenue into profits during the entire period which grew from one year to the other. Consequently, the operations of Nike are profitable.
Figure 1: Nike’s net income worldwide from 2005 to 2017 (in million U.S. dollars)
Figure 1 above shows Nike’s Net income has been growing from year to year. This is because the company has acquired other companies as well as its reputation of being a sponsor of athletics world wide. Furthermore, the company has more than 1000 retail stores that are spread the world all over (NYSE). One of the other contributing factors to its success is the use of celebrity sponsorship agreements and use of college athletic programs to promote their technology as well as design.
Mergers and acquisitions have been a common characteristics of this industry. Nike has highly benefited from this having generated a revenue of 32 billion U.S dollars in 2016. Nike has teamed up with fashion designers to produce modern and urban clothing styles as well as expand their product lines (NYSE). Their income is also being driven by a shift from formal dressing to more trendy and casual wear which form part of what they sell as well as demand from certain demographics such as baby boomers and teenagers.
Stock Performance
Figure 2: Nike Stock Performance
.
The graph shows the performance of Nike’s Stock Performance. Its performance has been increasing from 2014 to 2016.Which was followed by a decrease between 2016 and 2017. In late 2017 its performance picks which spreads over to 2018 (Reuters). The performance ratio of the company was less between 2014 and 2015. Since then the company has experienced an upward movement scale. Furthermore, Nike’s Stock performance can be used to come up with its PEG ratio as well as Security Market Line (SML).
The company’s Capital asset pricing model (CAPM) is used to indicate what should be the expected or required rate of return on risky assets (NYSE). Nikes CAPM indicates that the expected rate of return is higher than its expected risk free rate of return. Consequently, shareholders should invest in the company’s stock.
Return
Rate of Return (RF) 3.01%
Expected rate of return on market portfolio 12.53%
Systematic risk (β) of Nike’s common stock 0.92%
Expected rate of return on Nike’s common stock 11.81%
CAPM= Rf + β(Rm-Rf)
= 3.01% + 0.92 [12.53% – 3.01%]
= 11.81%
Based on Nike’s excellent performance it would be prudent to invest in the company. Furthermore, the company’s performance can only get better in the coming days.
Works Cited
Market, Watch. “Nike Inc. Cl B.” MarketWatch: Stock Market News – Financial News, www.marketwatch.com/investing/stock/nke/financials.
Nike Inc. “Nike Explore Team Sport Research Lab.” Nike News, about.nike.com/pages/nike-explore-team-sport-research-lab. Accessed 6 Apr. 2018.
NYSE. “Nike Inc. (NKE) | CAPM.” Stock Analysis on Net, www.stock-analysis-on.net/NYSE/Company/Nike-Inc/DCF/CAPM#Rates-of-Return.
Reuters, Editorial. “${Instrument_CompanyName} ${Instrument_Ric} Chart| Reuters.com.” U.S, 2018, www.reuters.com/finance/stocks/chart/NKE. Accessed 6 Apr. 2018.
