This is a Collaborative Learning Community (CLC) Assignment.

Posted: January 8th, 2023

This is a Collaborative Learning Community (CLC) Assignment.

Introduction
Nike is a USA-based multinational company that was founded in 1964 by Phil Knoght and Bill Bowerman. Initially named Blue Ribbon Sports when it was founded in 1964, the company officially changed its name to Nike in 1971. It is engaged in the design, development, manufacture, marketing, and sale of sports equipment, accessories and apparel under the Nike, Converse, Hurley and Jordan brand names. In fact, it is a publicly traded company with its headquarters in Washington County, in the metropolitan area of Portland, Oregon. This is a Collaborative Learning Community (CLC) Assignment.

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Currently, Nike is the global leader in terms of sales within the sports industry with revenue exceeding $36 billion as reported in 2018. In addition, it is the most valuable global sports brand at $32.4 billion, based on 2019 figures. The company’s mission is to “bring inspiration and innovation to every athlete in the world”, indicating an intention to address all the sporting equipment, accessories and apparel needs of every individual across the world (Nike, 2019). Over the years, Nike has shown remarkable expansion and growth of its brands and product lines. This has allowed the company to compete with other global sports brands such as Adidas, always producing designs that are functional, fashionable, and of high quality at competitive prices. The present report evaluates the most current financial ratios for Nike in regards to liquidity, asset management, solvency, profitability, and market ratios. In addition, this report will offer a recommendation on Nike’s suitability as an investment opportunity.
Discussion
Liquidity ratios
Liquidity ratios are intended to determine the company’s capacity to pay off its current debt obligations using funds available within the company and without using capital from external sources(Goel, 2015). The calculation was first conducted for working capital the presented the different between current assets and current liabilities as an indication of whether the company has adequate cash flow to meet its short-term expenses and liabilities. This is a Collaborative Learning Community (CLC) Assignment. The working capital was calculated at $8,659,000 for 2019, down from $9,094,000 reported for 2018. This is an indication of reduced liquidity from 2018 to 2019 financial years.
Secondly, calculations were conducted for current ratio as a measure of the company’s ability to pay off current liabilities using current assets that include inventories, accounts receivables and cash. It is calculated as current assets divided by current liabilities. The current ratio was calculated at 2.1 for 2019, down from 2.5 reported for 2018. This is an indication that the company’s liquidity position worsened between 2018 and 2019. This is a Collaborative Learning Community (CLC) Assignment.
Thirdly, calculations were conducted for cash ratio as a measure of the company’s ability to pay off short-term debt obligations using cash and cash equivalents. It is calculated as cash and cash equivalents divided by current liabilities. The cash ratio was calculated at 0.57 for 2019, down from 0.70 reported for 2018. This is an indication that the company’s liquidity position worsened between 2017 and 2018 since it only had enough cash and cash equivalents to pay off 70% of current liabilities in 2018 with the figure reducing to 57% in 2019.
Fourthly, calculations were conducted for quick (acid-test) ratio as a measure of the company’s ability to use the most liquid assets to meet short-term debt obligations. It is calculated as the sum of cash and cash equivalents, market securities and accounts receivable, divided by current liabilities. The quick ratio was calculated at 1.14 for 2019, down from 1.45 reported for 2018. This is an indication that the company’s liquidity position worsened between 2018 and 2019.The low liquidity ratios are an indication that the company has difficulty in funding its debt.
Asset managementratios
Asset management ratios are used to evaluate the company’s efficiency and effectives in managing assets to produce sales. This is based on the awareness that investment in assets influences operating capital, profitability, free cash flow, and stock price(Goel, 2015). The calculations were first conducted for inventory turnover ratio that is calculated by dividing the net sales by the inventory. The inventory turnover ratio was calculated at 3.98 for 2019, up from 3.96 reported for 2018. This is an indication that the company is selling its stocks at a faster rate so that the danger of stockouts increases and there is a need to invest more in assets.
Secondly, calculations were conducted for days’ sales in inventory. It is intended to show how many days the company takes to sell its inventory. This is calculated by dividing the number of days in a year (365) by the inventory turnover. The days’ sales in inventorywas calculated at 91.77 days for 2019, down from 92.11 reported for 2018. This decrease is an indication that the company stocks are taking less time to sell.
Thirdly, calculations were conducted for accounts receivable turnover, an indication of how fast the company collects its accounts receivable. It is calculated as sales divided by the accounts receivable. The accounts receivable turnover was calculated at 0.099 for both 2018 and 2019. The low figures are an indication that the company is not collecting its credit accounts on a timely basis. There is a need to revise the credit and collections policy to increase the accounts receivable turnover figure.
Solvencyratios
Solvency ratio measures the company’s ability to meet its debt obligations should it close down at that moment in time. In fact, it shows whether the company has sufficient cash flow to cover its liabilities (both short-term and long-term liabilities)(Goel, 2015). The first calculation was for debt ratio, showing the extent of the company’s leverage. It is calculated by dividing total debt by total assets. The debt ratio was calculated at 61.9% for 2019, up from 56.5% reported for 2018. This is an indication that although most of the company assets are funded using equity thus reducing the risk of defaulting on loans, it has increased the ratio of liabilities to assets between the two years. This is a Collaborative Learning Community (CLC) Assignment.
Secondly, calculations were conducted for debt to equity ratio, showing the extent of the company’s leverage.In fact, it is a measure of the degree to which company operations are funded through debt verses wholly owned funds. This acts as a reflection of the company’s ability to pay debts in case a financial downturn occurs. It is calculated as the total liabilities divided by the total shareholder equity. The debt to equity ratio was calculated at 1.62 for 2019, up from 1.30 reported for 2018. This is an indication that investor financing has reduced even as creditor financing increased over the two years. This is a Collaborative Learning Community (CLC) Assignment.
Thirdly, calculations were conducted for equity multiplier ratio. It compares average values by dividing the average total assets against the average total shareholder equity. The equity multiplier ratio was calculated at 2.45 for 2019, up from 2.06 reported for 2018. This is an indication that the company is in more debt and its capital structure is more leveraged.
Profitabilityratios
The profitability ratios indicate the company’s ability to generate earnings relative to shareholder equity, assets, operating costs, and revenue over time(Goel, 2015). The first calculation was for gross profit margin that compared gross profit to sales revenue. It is an indication of how must cost is spent on producing goods and services, and how this affects earnings. The gross profit margin increased from 43.8% in 2018 to 44.7% in 2019. This is an indication that the company increased the efficiency of its core operations. This is a Collaborative Learning Community (CLC) Assignment.
Secondly, calculations were conducted for net profit margin. It is calculated by dividing the net income by total revenue to show how profitable the company is after taking care of all the expenses hat include taxes and interest. The net profit margin increased from 5.3% in 2018 to 10.3% in 2019, an indication that the company increased the efficiency of its core operations.
Thirdly, calculations were conducted for return on total assets, showing the net earnings relative to total assets. It indicates how much after tax profits were generated in the company for every dollar of assets. The return on total assets increased from 0.08 in 2018 to 0.17% in 2019. This is an indication that the company has become less capital intensive over the two years.
Fourthly, calculations were conducted for asset turnover ratio to determine the company’s ability to generate sales using its assets. In fact, it show how much is generated in sales for every unit of money spent on assets. It is calculated as net sales divided by the average total assets. The asset turnover ratio increased from 1.59 in 2018 to 1.69 in 2019. This is an indication that the company is generating more sales from each unit dollar of assets.
Market ratios
The market ratios evaluate the company’s economic status as a publicly traded company. It show how well the stocks are priced, and whether they are fairly priced, undervalued or overvalued(Goel, 2015). The first calculation was for price/earnings ratio that is calculated by dividing the stock price by the earnings per share. The ratio increased from 20.7 reported in 2017 to 60.3 reported in 2018. This is an indication that the company stocks are overvalued.
Secondly, calculations were conducted for divided yield ratio. This was calculated by dividing the total dividend payment by the market price of the stock. The ratio decreased from 1.3% reported in 2017 to 1.1% reported in 2018. This is an indication that the return on investment reduced for shareholders over the two years.
Thirdly, calculations were conducted for dividend payout as a ratio of the total amount of dividends paid out related to the company’s net income. It shows how much money the company pays out to shareholders versus how much is kept in hand as retained earnings to reinvest in company activities. The ratio increased from 27.3% in 2017 to 65.5% in 2018, an indication that the company is paying out more to shareholders while reinvesting less in company activities. This is a Collaborative Learning Community (CLC) Assignment.
Conclusion
Nike is a publicly traded company thus making it a target for investors. Although the company has presented growth in its financial results, particularly in its revenues and brand value, additional financial analysis is necessary to determine its suitability for investment. Towards this end, the company’s financial results were subjected to ratio analysis. Firstly, liquidity ratios were calculated with the results showing that the company is less liquid. It has reduced capacity to pay off its current debt obligations using funds available within the company and without using capital from external sources. Secondly, asset management ratios were calculated to show its efficiency and effectives in managing assets to produce sales. The results show that asset management efficiency and effectiveness to produce sales reduced. Thirdly, solvency ratios were calculated to show the company’s ability to meet debt obligations with the results showing that the company’s cash flow to cover liabilities reduced. This is a Collaborative Learning Community (CLC) Assignment. Fourthly, profitability ratios were calculated to show the company’s ability to generate earnings relative to shareholder equity, assets, operating costs, and revenue over time. The results indicate that the company is generating more earnings relative to expenditure over time. Finally, market ratios were calculated to evaluate the company’s economic status as a publicly traded company with the results indicating that the stocks are overvalued and return on investment reduced. These results are an indication that Nike may not offer great value for investors and it is not a good idea to invest in the company at this time unless strategic changes are made to improve financial performance. This is a Collaborative Learning Community (CLC) Assignment.