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

Content
No.

Content

Page

1.

Brief Background History of NIKE, Inc. ( NKE )

2.

Recent Development of NIKE, Inc. ( NKE )

3.

Profitability ratios

5,6

4.

Financial Stability Ratios

7,8

5.

P/E ratio

(Justification on whether the companys shares are worthy of investment.)

6.

Appendix

10-22

7.

References

23

HISTORY & HERITAGE

Before 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.

Recent development
2000 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 industrys gold standard.
Just as Nikes products have evolved, so has Nikes approach to marketing. The 2002 Secret
Tournament campaign was Nikes 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 Nikes 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 its based on a core
commitment to innovation. Thats how we stay opportunistic, serve the athlete, reward our shareholders,
and continue to lead our industry.

PROFITABILITY RATIOS
PROFITABILITY
RATIOS
RETURN ON
EQUITY (ROE)

2012
(In millions)
2, 223
10, 112 x 100%
= 21.98%

2013
(In millions)
2, 485
10, 768.5 x 100%
= 23.08%

INTERPRETATION

NET PROFIT
MARGIN (NPM)

2, 223
24, 128 x 100%
= 9.21%

2, 485
25, 313 x 100%
= 9.82%

GROSS PROFIT
MARGIN (GPM)

10, 471
24, 128 x 100%
= 43.40%

11, 034
25, 313 x 100%
= 43.60%

SELLING
EXPENSE RATIO
(SER)

3, 715. 5
24, 128 x 100%
= 15.40%

3, 890
25, 313 x 100%
= 15.37%

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.
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.
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).
During 2012-21013
period, the business
of Nike Company
SER has increased
from 15.40% to
15.37%.
This means that
5

GENERAL
EXPENSE RATIO
(GER)

3, 715.5
24, 128 x 100%
= 15.40%

3, 890
25, 313 x 100%
= 15.37%

FINANCIAL
EXPENSE RATIO
(FER)

2, 118
24, 128 x100%
= 8.78%

1, 040
25, 313 x100%
= 4.11%

Nike Company is
getting better at
controlling its
selling expenses.
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.
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.

FINANCIAL STABILITY RATIOS

STABILITY
RATIOS
WORKING
CAPITAL (WCR)

2012
(In millions)
11, 531
3, 865
= 2.98: 1

2013
(In millions)
13, 626
3, 926
= 3.47: 1

INTERPRETATION

TOTAL DEBT
(TDR)

5,084
15,465 x100%
= 32.87%

6, 428
17, 584 x100%
= 36.56%

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
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.
During 2012- 2013
period, the business
of Nike Company
TDR has increased
from 32.87% to
36.56%.
This means that
Nike Companys
total debt has
increased.
However, it is still
less than the
maximum limit of
debt which is 50%.
During 2012- 2013
period, the business
of Nike Company
ITR has increased
from 81 days to 85
days.
This means that
7

DEBTOR
TURNOVER (DIR)

365 days
(12, 064)
3, 209

365 days
(12, 656. 5)
3, 124. 5

= 97.1 days

= 90.1 days

INTEREST
COVERAGE (ICR)

4 + 2,223
4
= 556.8 times

3+ 2,485
3
= 829.3 times

Nike Company is
selling its inventory
slower.
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.
During 2012-2013
period, the business
Nike Company has
increased from
556.8 times to
829.3 times.
This means that
Nike Companys
ability to pay its
interest expense is
stronger.
In addition, the
business satisfies
the minimum
requirement of five
times.

Price/Earning Ratio (P/E Ratio)

Price/ Earning

P/E
Ratio

Current ( 29th May 2014 )

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

Interpretation
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
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 companys 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.

APPENDIX

10

Nike, Inc ( NKE ) Balance Sheet

11

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

802,000

1,472,000

594,000

13,626,000

11,845,000

11,297,000

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

993,000

910,000

894,000

17,584,000

15,465,000

14,998,000

3,730,000

3,555,000

3,571,000

178,000

157,000

387,000

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

1,292,000

974,000

921,000

Minority Interest

Negative Goodwill

6,428,000

5,084,000

5,155,000

Misc Stocks Options Warrants

Redeemable Preferred Stock

Preferred Stock

Common Stock

3,000

3,000

3,000

5,695,000

5,588,000

Treasury Stock

Capital Surplus

5,184,000

4,641,000

3,944,000

274,000

149,000

95,000

Other Current Assets

Total Current Assets
Long Term Investments
Property Plant and Equipment

Deferred Long Term Asset Charges

Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities

Deferred Long Term Liability Charges

Total Liabilities
Stockholders' Equity

Retained Earnings

Other Stockholder Equity

5,801,00012
-

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

13

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

7,780,000

7,065,000

6,361,000

Non Recurring

Others

Total Operating Expenses

3,254,000

3,083,000

2,841,000

Operating Expenses
Research Development
Selling General and Administrative

Operating Income or Loss

Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops

15,000

(54,000)

25,000

3,272,000

3,025,000

2,862,000

3,272,000

3,025,000

2,862,000

808,000

756,000

690,000

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

2,485,000

2,223,000

2,485,000

2,223,000

Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares

2,133,000
14
2,133,000

Nike, Inc ( NKE )s Cash Flow

Period Ending
Net Income

May 31, 2013

2,485,000

May 31, 2012

May 31, 2011

2,223,000

2,133,000

513,000

405,000

358,000

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)

3,027,000

1,899,000

1,812,000

(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)

(1,067,000)

514,000

(1,021,000)

(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)

(1,040,000)

(2,118,000)

(1,972,000)

Effect Of Exchange Rate Changes

100,000

67,000

57,000

Change In Cash and Cash Equivalents

1,020,000

362,000

(1,124,000)

Operating Activities, Cash Flows Provided By or Used In

Depreciation

Total Cash Flow From Operating

Activities

Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures

Total Cash Flows From Investing

Activities

Financing Activities, Cash Flows Provided By or Used In

Dividends Paid

Other Cash Flows from Financing Activities Total Cash Flows From Financing
Activities

15

Price Earning ( P/E ) Ratio

( refer to Earning per share )

16

17

NIKE, Inc. ( NKE ) Consolidated

Statements Of Income

18

NIKE, Inc.( NKE ) Consolidated

Statements of Comprehensive Income

19

NIKE, Inc. ( NKE ) Consolidated Balance

Sheets

20

Consolidated Statements of Income

21

Consolidated Balance Sheets

22

Price Earning ( P/E ) Ratio

References
23

1) http://nikeinc.com/pages/history-heritage
2) http://investors.nikeinc.com/files/doc_financials/AnnualReports/2013/docs/nike-2013proxy.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-form10K.pdf
5) http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form10K.pdf
6) http://investors.nikeinc.com/Investors/Stock-Information/Stock-Quote-and-Chart/default.aspx

24