SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN

Financial Ratio Analysis

NAME : LEE PEI GIE ( 0315653 )

KHOO XIN YEE ( 0316180 )

COURSE : FNBE

MODULE : BASIC ACCOUNTING[FNBE0145]

SESSION : FEBRUARY, 2014

LECTURER : MR. CHANG JAU HO

SUBMISSION DATE: 31TH MAY 2014

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Content

No. Content Page1. Brief Background History of NIKE, Inc. ( NKE ) 3

2. Recent Development of NIKE, Inc. ( NKE ) 4

3. Profitability ratios 5,6

4. Financial Stability Ratios 7,8

5. P/E ratio (Justification on whether the company’s shares are worthy of investment.)

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6. Appendix 10-22

7. References 23

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HISTORY & HERITAGEBefore there was the Swoosh, before there was Nike, there were two visionary men who

pioneered a revolution in athletic footwear that redefined the industry.

Nike, originally known as Blue Ribbon Sports (BRS), was founded by University of Oregon track athlete Philip Knight and his coach Bill Bowerman in January 1964. The company initially operated as a distributor for Japanese shoe maker Onitsuka Tiger (now ASICS), making most sales at track meets out of Knight's automobile.

In 1964, in its first year in business, BRS sold 1,300 pairs of Japanese running shoes grossing $8,000. By 1965 the fledgling company had acquired a full-time employee, and sales had reached $20,000. In 1966, BRS opened its first retail store, located at 3107 Pico Boulevard in Santa Monica, California next to a beauty salon, so its employees no longer needed to sell inventory from the back of their cars. In 1967, due to rapidly increasing sales, BRS expanded retail and distribution operations on the East Coast, in Wellesley, Massachusetts.

By 1971, the relationship between BRS and Onitsuka Tiger was nearing an end. BRS prepared to launch its own line of footwear, which would bear the Swoosh newly designed by Carolyn Davidson. The Swoosh was first used by Nike on June 18, 1971, and was registered with the U.S. Patent and Trademark Office on January 22, 1974.

In 1976, the company hired John Brown and Partners, based in Seattle, as its first advertising agency. The following year, the agency created the first "brand ad" for Nike, called "There is no finish line", in which no Nike product was shown. By 1980, Nike had attained a 50% market share in the U.S. athletic shoe market, and the company went public in December of that year.

Together, Nike and Wieden+Kennedy have created many print and television advertisements, and Wieden+Kennedy remains Nike's primary ad agency. It was agency co-founder Dan Wieden who coined the now-famous slogan "Just Do It" for a 1988 Nike ad campaign, which was chosen by Advertising Age as one of the top five ad slogans of the 20th century and enshrined in the Smithsonian Institution.

Walt Stack was featured in Nike's first "Just Do It" advertisement, which debuted on July 1, 1988. Wieden credits the inspiration for the slogan to "Let's do it", the last words spoken by Gary Gilmore before he was executed.

Throughout the 1980s, Nike expanded its product line to encompass many sports and regions throughout the world. In 1990, Nike moved into its eight-building World Headquarters campus in Beaverton, Oregon.

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Recent development2000 – Present: Leading a New Generation

Nike rang in the new millennium with a new footwear cushioning system called Nike Shox, which debuted during Sydney in 2000. The development of Nike Shox culminated more than 15 years of perseverance and dedication, as Nike designers stuck with their idea until technology could catch up. The result was a cushioning and stability system worthy of joining Nike Air as the industry’s gold standard.

Just as Nike’s products have evolved, so has Nike’s approach to marketing. The 2002 “Secret Tournament” campaign was Nike’s first truly integrated, global marketing effort. Departing from the traditional “big athlete, big ad, big product” formula, Nike created a multi-faceted consumer experience in support of the World Cup.

“Secret Tournament” incorporated advertising, the Internet, public relations, retail and consumer events to create excitement for Nike’s soccer products and athletes in a way no single ad could ever achieve. This new integrated approach has become the cornerstone for Nike marketing and communications.

Today, Nike continues to seek new and innovative ways to develop superior athletic products, and creative methods to communicate directly with our consumers. The company has continued to expand in new ways, including strong growth in China and a deal to become the official sponsor of the National Football League (NFL) beginning in 2012.

President and CEO Mark Parker said: “At NIKE, Inc. we run a complete offense, and it’s based on a core commitment to innovation. That’s how we stay opportunistic, serve the athlete, reward our shareholders, and continue to lead our industry.”

PROFITABILITY RATIOSPROFITABILITY

RATIOS2012

(In millions)2013

(In millions)INTERPRETATION

RETURN ON EQUITY (ROE)

2, 223 10, 112 x 100%= 21.98%

2, 48510, 768.5 x 100%= 23.08%

During 2012-2013 period, the business of Nike Company ROE has increased from 21.98% to 23.08%.

The Nike Company is getting more return from its investment.

NET PROFIT MARGIN (NPM)

2, 22324, 128 x 100%= 9.21%

2, 48525, 313 x 100%= 9.82%

During 2012-2013 period, the business of Nike Company NPM has increased from 9.21% to 9.82%.

This means that Nike Company is getting better of controlling its overall expenses.

GROSS PROFIT MARGIN (GPM)

10, 47124, 128 x 100%= 43.40%

11, 03425, 313 x 100%= 43.60%

During 2012-2013 period, the business of Nike Company GPM has increased from 43.40% to 43.60%.

This means that Nike Company is getting better of controlling its Cost Of Goods Sold (COGS).

SELLING EXPENSE RATIO (SER)

3, 715. 524, 128 x 100%= 15.40%

3, 89025, 313 x 100%= 15.37%

During 2012-21013 period, the business of Nike Company SER has increased from 15.40% to 15.37%.

This means that Nike Company is

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getting better at controlling its selling expenses.

GENERAL EXPENSE RATIO (GER)

3, 715.524, 128 x 100%= 15.40%

3, 89025, 313 x 100%= 15.37%

During 2012-21013 period, the business of Nike Company SER has increased from 15.40% to 15.37%.

This means that Nike Company is getting better at controlling its general expenses.

FINANCIAL EXPENSE RATIO (FER)

2, 11824, 128 x100%= 8.78%

1, 04025, 313 x100%= 4.11%

During 2012- 2013 period, the business of Nike Company FER has decreased from 8.78% to 4.11%.

This means that Nike Company is getting better at controlling its financial expenses.

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FINANCIAL STABILITY RATIOS

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STABILITY RATIOS

2012 (In millions)

2013(In millions)

INTERPRETATION

WORKING CAPITAL (WCR)

11, 531 3, 865= 2.98: 1

13, 626 3, 926= 3.47: 1

During 2012- 2013 period, the business of Nike Company WCR has increased from 2.98: 1 to 3.47: 1.

This means that Nike Company ability to pay current liability with current asset is getting better.

In addition, the business of Nike Company satisfies the requirement of 2:1.

TOTAL DEBT (TDR)

5,08415,465 x100%= 32.87%

6, 42817, 584 x100%= 36.56%

During 2012- 2013 period, the business of Nike Company TDR has increased from 32.87% to 36.56%.

This means that Nike Company’s total debt has increased.

However, it is still less than the maximum limit of debt which is 50%.

STOCK TURNOVER (ITR)

365 days ÷ (13, 657) 3, 032. 5= 81 days

365 days ÷(14, 279) 3, 328= 85 days

During 2012- 2013 period, the business of Nike Company ITR has increased from 81 days to 85 days.

This means that Nike Company is selling its inventory slower.

DEBTOR TURNOVER (DIR)

365 days ÷ (12, 064) 3, 209

= 97.1 days

365 days ÷(12, 656. 5) 3, 124. 5

= 90.1 days

During 2012-2013 period, the business of Nike Company has decreased from 97.1 days to 90.1 days.

This means that Nike Company is collecting its debts faster.

INTEREST COVERAGE (ICR)

4 + 2,223 4= 556.8 times

3+ 2,485 3= 829.3 times

During 2012-2013 period, the business Nike Company has increased from 556.8 times to

Price/Earning Ratio (P/E Ratio)Price/ Earning Current ( 29th May 2014 ) Interpretation

P/E Ratio

Current share price Earnings per share = $ 76.27 $ 2.68= $ 28.5 days

The P/E ratio of NKE as of 29th May 2014 is 28.5 years. This means investors who bought a share of NKE would have to wait 28.5 years in order to retain their investments, in this case, $ 76.27. The P/E ratio is also higher than what a conservative investor would pay, which is higher than 15 years.

Investment Recommendation

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In our recommendation through our analysis, the company NKE would not be a company worth investing on.

It is obvious that the company does not exhibit good profitability, as shown in the profitability ratio analysis. Firstly, the Return on Enquity has increased by 1.1% which shows that the net profit has also increased through the years. NKE also showed that it is getting better of controlling Gross Profit Margin, which shows the company is getting better of controlling its Cost of Goods Sold. Furthermore, the Selling Expense Ratio and General Expense Ratio has shown an improvement of the company’s control on their selling and general expenses. Moreover, the Net Profit Margin, which shows how the business controls all its expenses, has prominently been increased by 4.67%.

As for stability, even though the Total Debt has increased has increased, it is still lower than the maximum 50% limit for both years 2012 and 2013, which means the business has kept it below the limit for a long time. In addition, the debtors are getting faster at paying their debts to the company as seen in the Debtor Turnover Ratio. In addition, the company has also improved their ability to pay current liability with current asset as shown in Working Capital. This situation goes same to their ability to pay its interest expense which is reflected by the Interest Coverage. However, this business has some flaws too. It is selling its inventory slower in 2013 as compared to 2012.

When it comes to the aspect of price, the share is considered expensive. The price per earning is higher than what a conservative investor would pay, which is higher than 15 years. The investors can receive their investments only after 29 years.

Thus even though the business portrayed good profitability and stability, it is the matter of price that make us think that the company NKE would not be a company worth investing on.

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APPENDIX

Nike, Inc ( NKE )’ Balance Sheet

Period Ending May 31, 2013 May 31, 2012 May 31, 2011

Assets

Current Assets

Cash And Cash Equivalents 3,337,000   2,317,000   1,955,000  

Short Term Investments 2,628,000   1,440,000   2,583,000  

Net Receivables 3,425,000   3,394,000   3,450,000  

Inventory 3,434,000   3,222,000   2,715,000  

Other Current Assets 802,000   1,472,000   594,000  

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Total Current Assets 13,626,000   11,845,000   11,297,000  

Long Term Investments -   -   -  

Property Plant and Equipment 2,452,000   2,209,000   2,115,000  

Goodwill 131,000   131,000   205,000  

Intangible Assets 382,000   370,000   487,000  

Accumulated Amortization -   -   -  

Other Assets -   -   -  

Deferred Long Term Asset Charges 993,000   910,000   894,000  

Total Assets 17,584,000   15,465,000   14,998,000  

Liabilities

Current Liabilities

Accounts Payable 3,730,000   3,555,000   3,571,000  

Short/Current Long Term Debt 178,000   157,000   387,000  

Other Current Liabilities 18,000   170,000   -  

Total Current Liabilities 3,926,000   3,882,000   3,958,000  

Long Term Debt 1,210,000   228,000   276,000  

Other Liabilities -   -   -  

Deferred Long Term Liability Charges 1,292,000   974,000   921,000  

Minority Interest -   -   -  

Negative Goodwill -   -   -  

Total Liabilities 6,428,000   5,084,000   5,155,000  

Stockholders' Equity

Misc Stocks Options Warrants -   -   -  

Redeemable Preferred Stock -   -   -  

Preferred Stock -   -   -  

Common Stock 3,000   3,000   3,000  

Retained Earnings 5,695,000   5,588,000   5,801,000  

Treasury Stock -   -   -  

Capital Surplus 5,184,000   4,641,000   3,944,000  

Other Stockholder Equity 274,000   149,000   95,000  

Total Stockholder Equity 11,156,000   10,381,000   9,843,000  

Net Tangible Assets 10,643,000   9,880,000   9,151,000  

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Nike, Inc ( NKE )’s Income ( P&L ) Statements

Period Ending May 31, 2013 May 31, 2012 May 31, 2011

Total Revenue 25,313,000   23,331,000   20,117,000  

Cost of Revenue 14,279,000   13,183,000   10,915,000  

Gross Profit 11,034,000   10,148,000   9,202,000  

Operating Expenses

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Research Development -   -   -  

Selling General and Administrative 7,780,000   7,065,000   6,361,000  

Non Recurring -   -   -  

Others -   -   -  

Total Operating Expenses -   -   -  

Operating Income or Loss 3,254,000   3,083,000   2,841,000  

Income from Continuing Operations

Total Other Income/Expenses Net 15,000   (54,000) 25,000  

Earnings Before Interest And Taxes 3,272,000   3,025,000   2,862,000  

Interest Expense -   -   -  

Income Before Tax 3,272,000   3,025,000   2,862,000  

Income Tax Expense 808,000   756,000   690,000  

Minority Interest -   -   -  

Net Income From Continuing Ops 2,464,000   2,269,000   2,172,000  

Non-recurring Events

Discontinued Operations 21,000   (46,000) (39,000)

Extraordinary Items -   -   -  

Effect Of Accounting Changes -   -   -  

Other Items -   -   -  

Net Income 2,485,000   2,223,000   2,133,000  

Preferred Stock And Other Adjustments -   -   -  

Net Income Applicable To Common Shares 2,485,000   2,223,000   2,133,000

Nike, Inc ( NKE )’s Cash FlowPeriod Ending May 31, 2013 May 31, 2012 May 31, 2011

Net Income 2,485,000   2,223,000   2,133,000  

Operating Activities, Cash Flows Provided By or Used In

513,000   405,000   358,000  

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Depreciation

Adjustments To Net Income 71,000   70,000   29,000  

Changes In Accounts Receivables 142,000   (323,000) (273,000)

Changes In Liabilities 41,000   470,000   151,000  

Changes In Inventories (197,000) (805,000) (551,000)

Changes In Other Operating Activities (28,000) (141,000) (35,000)

Total Cash Flow From Operating

Activities3,027,000   1,899,000   1,812,000  

Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures(636,000) (597,000) (432,000)

Investments (1,203,000) 1,146,000   (560,000)

Other Cash flows from Investing Activities 772,000   (35,000) (29,000)

Total Cash Flows From Investing

Activities(1,067,000) 514,000   (1,021,000)

Financing Activities, Cash Flows Provided By or Used In

Dividends Paid(703,000) (619,000) (555,000)

Sale Purchase of Stock (1,361,000) (1,346,000) (1,514,000)

Net Borrowings 937,000   (203,000) (8,000)

Other Cash Flows from Financing Activities -   -   -  

Total Cash Flows From Financing

Activities(1,040,000) (2,118,000) (1,972,000)

Effect Of Exchange Rate Changes 100,000   67,000   57,000  

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Change In Cash and Cash Equivalents 1,020,000   362,000   (1,124,000)

Price Earning ( P/E ) Ratio

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( refer to Earning per share )

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NIKE, Inc. ( NKE ) Consolidated Statements Of Income

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NIKE, Inc.( NKE ) Consolidated Statements of Comprehensive Income

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NIKE, Inc. ( NKE ) Consolidated Balance

Sheets

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Consolidated Statements of Income

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Consolidated Balance Sheets

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Price Earning ( P/E ) Ratio

References23

1) http://nikeinc.com/pages/history-heritage

2) http://investors.nikeinc.com/files/doc_financials/AnnualReports/2013/docs/nike-2013-proxy.pdf

3)http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=NKE&dataset=incomeStatement&period=A&currency=native

4) http://investors.nikeinc.com/files/doc_financials/AnnualReports/2013/docs/nike-2013-form-10K.pdf

5) http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf

6) http://investors.nikeinc.com/Investors/Stock-Information/Stock-Quote-and-Chart/default.aspx

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