By: Kenny Pizarro-Perez

Minh Nghiem
Jason Zhu

Table of Content

Executive Summary………………………………………………………………….3
Introduction……………………………………………………………………………4

Industry Analysis…………………………………………………………………..…5

Economic Analysis…………………………………………………………..……….7

Short Term Liquidity………………………………………………………………….9

Asset Utilization ……………………………………………………………………..10

Solvency Analysis…………………………………………………………………...10

Profitability Analysis………………………………………………………………...11

Return on Investment Analysis……………………………………………………12

Market Measures……………………………………………………………………..13

Conclusion…………………………………………………………………………….13

Appendix………………………………………………………………………...…….14

Nike Consolidated Statements…………………………………………………….16

Common Size Statements...………………………………………………………..17

Executive Summary

Nike has been an industry leader in the athletic footwear industry and sports

apparel. Nike’s brand image has drastically increased throughout the years. They have

been able to add big names such as Kobe Bryant, Michael Jordan and Kevin Durant.

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These athletes and many others have helped increased brand image and awareness.

The first building block we focus on as a group is short term liquidity analysis which

focuses on how well the company can pay off it’s short term debt. The next ratio we

focused on is the asset utilization ratio which represents how well the company is

currently using their assets. The solvency ratio and the profit margin ratio. The profit

margin ratio represents how much profit the company is actually making. The profit

margin ratio is one of the most highly used ratios that help determine whether or not an

investors should invest in a specific company. The other major ratio and our last

building block focuses on the return on investment ratios. These ratios are also highly

used. As an investor one always want to know what kind of return on my capital am I

looking at. These ratios also analyze how well previous investors have done in respect

to the specific company. Finally we analyzed the market measure ratios of Nike. These

ratios represent the companies share of the market and also determines if an investor

has high expectations to ensure a positive return.

Introduction

Nike was founded in 1964 by Phil Knight and Bill Bowerman. Currently Nike is an

industry leader in athletic footwear and sports apparel. Nike currently has over 700

locations worldwide. Inside these location it includes all the manufacturing plants,

locations in which they sell their products and also where they conduct all their

financials. Nike is well known for their logo, the durability their product offers and how

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well they have been able to stay top of the market with innovated products. They

manufacture products that consumers are always in demand for. Nike’s footwear is

known for providing comfortable and unique sneakers. Nike focuses on Brand products

in many categories which include running, basketball, soccer, men and women physical

fitness training, action sports, sportswear and Golf. In regard to Nike’s control in the

sports industry the basketball segment also includes its Jordan brand product offerings,

and Men's training includes its baseball and American football product offerings. The

Company also designs products for kids, as well as for other athletic and recreational

uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor

activities. The Company's athletic footwear products are designed primarily for specific

athletic use, even though a large percentage of the products are worn for casual or

leisure purposes. Management strategies includes ensuring innovation is always in

effect. Part of the reason Nike has been able to control so much of the market is due to

innovation. Nike’s management have been able to adapt to all economic and social

changes while providing the consumers exactly what they want.

Industry Analysis

Nike specializes in the sporting goods industry including, but not limited to,

footwear, apparel, equipment, and accessories. They have dominated this industry for

many years across the US and the globe. They have a strong business plan and a deep

presence in the world of athletics as well as strategic marketing that places them way

above their competition. What contributes to their continuous success is their innovation

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and the talent to constantly address their consumers’ demands for the best and most

efficient goods.

The company has left an imprint on the world that signifies that they are the best

people can get. With such huge success for decades, Nike has no strong competitors

going heavily against them, but speaking of rival competitors, Adidas is another

worldwide company in the sporting goods industry that has been making sales in

Europe. UnderArmour is another company in the industry that is starting to be popular in

America. There are a fair amount of other competitors out there, but they have yet to

make a big splash into the industry that would challenge Nike. Adidas originating in

Europe has a stronger presence overseas than Nike and so the growth is slower than it

would be for the native companies. However, this is not to say that Nike is not getting a

hold of international competition since Nike has spread and held markets all over the

world. UnderArmour is gaining popularity with the newly designed technology that

further innovates compression clothing to better performance for the seasons and this is

rising in the states. Nike, like UnderArmour, has come up with similar technologies to

make this type of clothing possible as well and competes in that market. Despite these

minor challenges, Nike has adapted and innovated new ways to get back at them and

go beyond to lead the trends in the sports world.

The numbers are proof that Nike has done well in the industry. They have 59% of

the market shares worldwide and 48% in the United States. Their grasp on the market

dwarves all competition like Adidas whom has only 9% of the shares in the US. This

only further supports that Nike’s success is leaving a legacy in the industry which will

continue for years to come. In addition, Adidas has been dropping in America since

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2011 and continues to, so that small 9% could soon be 5% if Nike continues to thrive.

Within that market share, Nike is also the most dominant company in the basketball

world, holding 96% of all basketball sportswear.

Another show of dominance by Nike is their constant innovation of the next best

thing. They been in the game long enough to know what consumers wants while being

able to rival other name brands’ products. Their technology is top-notch while also

improving their system to better the environment. What dominates the industry is

lightweight material and Nike has done just that. In 2012, Nike hit a high of $86.89

billion due to their innovative technology of Flyknit, a revolutionary material of basically

knitted fabric that when sewed together is wearable as footwear, but impressively

breathable and super light. This has been the pinnacle of footwear that is great for

everyday running and comfort. This has changed the modern industry to focus more on

knitted material rather than leather. To add on to Nike’s innovative success, they also

changed how their products are made to improving the world and reducing waste. To

create clean material from used goods, Nike is recycling plastic bottles to create strands

of polyester which would be threaded into the fabric of their light apparel. They are

using less water to dye their products, reducing the usage of water used yearly for the

strenuous process to make their clothing appealing. They are creating the future for new

fields made of old, recycled sneakers where they grind them into bits that would be

used for playable fields and courts. These developments has proven time and time

again that Nike is for the people.

Economic Analysis

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 Nike has done very well economically. They continuously grown throughout the

years with huge bursts with the new innovative trends that they released, or otherwise

on a steady pace. It is expected of them to continue to do well this year since the

Olympics is taking place once again. The Olympics signifies the summit of athletes from

all over the world competing and there is no better way to display their products than on

the biggest stage in competitive sports. Additionally, with the economy steadily

improving since the recession, sales are expected to soar, even though it did not have

an effect on their revenue. What is a concern is the currency value that is fluctuating in

foreign countries, specifically in Latin America, Europe, and Japan. Currency

depreciation is the only thing presently existing that would affect their performance.

Although that is a concern, it is not one that would negatively affect their income, but

rather slow their growth down a bit. With this, the stock market is expected to be

relatively the same because there will not be a huge jump in stock, unless an

unforeseen event is to take hold.

Nike has been using the same strategy for years. Their motto revolves on

innovation and inspiration through successful marketing and branding. Innovation is

always priority for them, which is why Nike never ceases to amaze the competition and

the consumers. They want the best out there that revolutionizes how people present

themselves. This evident in their spendings which is called “Demand Creation” where

they spend $100 per second to market their products out there either through

sponsorships with famous athletes, collaborations with designers, or giant ads across

the world to get their brand out, “Just do it”. In addition to constant marketing, there is

street hype over old products especially the Jordan line of shoes. This hype is self

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sustaining and continues to exist for decades as free marketing for Nike which brings

them $2.25 billion constantly every year. A giant in the industry with so much presence

in the world has little to fear in the competition of this industry.

Short-term Liquidity Analysis

In general, Nike’s ratios are very steady and better than those of Adidas. The

current ratio in 2015 is significantly higher than Adidas’s, however, there is a downward

trend in recent years. In addition, quick ratio has been decreasing since 2013 which

raises a concern about the quality of Nike’s current assets. On the other hand, Nike has

good Working Capital, which has been increasing, especially with most of current

liabilities are considered lower risk. Net Trade Cycle, one of the important ratio, is high,

8
due to high number of Days’ Sales in Inventories. However, it is less dangerous with a

high number in Current Ratio. Also, Nike has been improving its operation to shorten its

Net Trade Cycle. Lastly, Nike’s cash flow from operation is high enough to cover its

current liabilities. This ratio is much higher than the benchmark of 40%. Overall, Nike

has sufficient short-term liquidity.

Asset Utilization

Nike does not carry nearly as much cash as it’s competitors but they still show a

steady increase in receivables. Every year they tend to have an increased their

receivables which can represent the company is moving more towards lending. Nike

should be conscious of its receivables increasing because it can represent a lax in how

Nike collects its debt. Nike has a low working capital compared to Adidas but they are

still able to pay off its current liabilities with its current assets 3.17 times over.

Solvency Analysis

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 This solvency ratio represents how well Nike can effectively pay its debt. Nike is

in a good position to pay off their debt. What stands out about these ratio is that Nike

has very little long term debt. In a rare case of bankruptcy they will not have to focus

much on long term debt. They will be able to pay off its debt in a timely manner. Also

Nike has been able to decrease its cash flow to fixed charges lowering how much of its

cash must be used to pay any immediate fixed charges. Nike has done well reducing its

fixed charges. Also nike’s z-score is very attractive compared to Adidas because they

are far from bankruptcy and it shows a good future free from bankruptcy for years to

come.

Profitability Analysis

Nike has done well in regards to its net profit margin. As stated in the executive

summary, this is one of the more important ratios. The gross profit margin indicate the

percentage of revenue that is available to cover all the operating expensing and other

10
expenditures. Adidas does provide a higher gross operating margin but Nike is still

healthy enough to pay additional expenses after cost of goods sold. The more important

number to focus on in this segment would be net profit margin. Nike, compared to one

of its biggest competitors has a much more attractive net profit margin. When noticing a

steady rate investors are more than likely to invest in Nike over Adidas. Nike tries to

keep its operating cost down compared to Adidas which is why they provide a more

attractive net profit margin. The Net profit margin represents how much of each dollar

earned in revenue is turned in profits. In Nike’s industry this is what investors want.

Return on Investment Analysis

Invested Capital in Nike shows good return rates. Return on Net Operating

Assets of Nike is significantly higher than that of Adidas and this ratio has been

increasing over the 5-year period. Return on Common Equity ratio it also increasing.

This is disaggregated into 3 components: Adjusted Profit Margin, Asset Turnover and

Financial Leverage Ratio, to analyze further. Asset Turnover and Financial Leverage

Ratio of Nike is at around the same level with Adidas’s. However, its Profit Margin is far

better than its competitor. Therefore, the high Return of Common Equity is due mostly

to a large amount in adjusted Profit Margin. Nike also shows significant equity growth

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rate compared to Adidas.The equity growth rate tells us how much Nike is worth if they

were no longer a company. This number has been increasing every year which also lets

us know this company is very healthy terms of what it's worth.

Market Measures

Nike is well known for being market leaders in their industry. Theses ratios

represent how well they are doing in those areas. In regards to price to earning, Nike

investors expect high returns. The larger the number the more investors are expecting

in return. Nike’s dividend payout ratio was increasing from 2011 until 2014. In year 2015

it represented the first year in many that dividend payout ratio has declined. In part it

has to do with the economy and how well the company is operating.

Conclusion

Nike is a healthy company that shows no signs of decreasing its market share

anytime soon. With that being said Nike does not have a lot of room for large growths in

the economy since they already control most of the market. For current investors we

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believe it's time for them to sale some of their shares and earn a huge profit if they

invested prior to 2006. For new investors who are looking for a safe return on their

investments, Nike is the way to go. They are always on a small but steady increase in

net profit margin along with its return on investments. These numbers slightly increase

every year but not enough for new investors who have little capital and are looking for

big returns. Nike is a mature company with no signs of bankruptcy anytime soon.

Appendix

Liquidity Ratios

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑎𝑠ℎ + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + 𝑆ℎ𝑜𝑟𝑡−𝑡𝑒𝑟𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠

Acid-test ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
Accounts receivable turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

Inventory turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

𝐸𝑛𝑑𝑖𝑛𝑔 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Days’ Sales in receivables = 𝑆𝑎𝑙𝑒𝑠/365

𝐸𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Days’ Sales in inventories = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑/365

Working Capital = Current Assets - Current Liabilities

365 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑

Days’ Purchases in Accounts Payable (AP) = 𝐴𝑃 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟; AP turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑃

Average Net Trade Cycle = Days’ Sales in receivables + Days’ Sales in inventories -
Days’ Purchases in Accounts Payable

Cash Provided by operations to average current liabilities (CL) =

𝐶𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠
(𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐶𝐿 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐶𝐿)/2

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Capital Structure and Solvency Ratios

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
Total debt to equity = 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

Total Liabilities/Total Assets

Long-term Debt/Total Assets

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
Financial Leverage Ratios = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

Financial Leverage Index = 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡𝑠

𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐸𝐵𝐼𝑇

Altman Z-Score = 1.2* + 1.4* + 3.3*𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 +
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑎𝑙𝑒𝑠
0.6* + 1.0*𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Earnings to fixed charges =

𝑃𝑟𝑒𝑡𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 − 𝑈𝑛𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑖𝑛 𝑎𝑓𝑓𝑖𝑙𝑖𝑎𝑡𝑒𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Cash flow to fixed Charges =

𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 + 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑎𝑥 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑟𝑒𝑛𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Profitability Ratios

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

Gross Profit Margin = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒

Operating Profit Margin = 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
Net profit margin = 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

Return on Invested Capital Ratios

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 (1−𝑇𝑎𝑥 𝑟𝑎𝑡𝑒) + 𝑚𝑖𝑛𝑜𝑟𝑖𝑡𝑦 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

Return on Assets = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

Return on Common Equity = = Adjusted PM + AT + FL Ratio
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

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 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
Adjusted Profit Margin = 𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
Asset turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Financial Leverage Ratio = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦

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Common-sized Balance Sheets

Common-sized Statements of Income

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