Building My Analysis

Financial Statement Analysis & Security Valuation (Fifth Edition)
Stephen Penman (2012)
Roadmap to Developing Your Own Financial Statement Analysis and Valuation Product
Introduction
This roadmap leads you through the steps to create a valuation tool. With this tool you will be abl
reformulate financial statements in a spreadsheet program, analyze the financial statements using
techniques in the book, forecast pro forma financial statements, and value firms from those pro fo
financial statements. In the end you will have a valuable tool to carry with you into your professio
and to use for your own personal investing.
Use the tool for:
Reformulating financial statements (as in Chapters 8-11)

Analyzing financial statements (as in Chapters 12-13)
Forecasting and valuation (as in Chapters 14-16)
Reverse Engineering (Chapter 7, 19)
You will find that building your own analysis product is very satisfying. It will help you grasp the co
behind the analysis, for the concepts come to life as you make them work for you in practice. And
discover the points where your understanding is weak. Off-the-shelf spreadsheet programs that y
use at the press of a button are available but pressing buttons is dangerous if you are not sure ab
is going on inside the program. Better to develop your own model, following sound principles, and
assured of the integrity of the product.
Once you have followed the roadmap here, think of adding your own bells and whistles. You can
customize the tool for particular industries. You can add a quality of earnings analysis (as in Chap
You can utilize spreadsheets features for scenario planning and risk analysis (as in Chapter 18).
can add a credit analysis (as in Chapter 19).
Please note that the numbers presented in this spreadshhet might not be exactly same as those o
textbook mainly because of rounding difference.
and Valuation Product
With this tool you will be able to

e financial statements using the
alue firms from those pro forma
with you into your professional life
It will help you grasp the concepts

ork for you in practice. And you will
preadsheet programs that you can
erous if you are not sure about what
owing sound principles, and so be
ells and whistles. You can

arnings analysis (as in Chapter 17).
nalysis (as in Chapter 18). And you
be exactly same as those on the

Financial Statement Analysis & Security Valuation Fifth Edition)
Stephen Penman 2012
The roadmap: steps for building the product
Chapter 8 gives the form of the financial statements you should work with and the accounting relations
that tie the various parts of the statements together. So read this chapter before beginning.
Start with reformulation of the financial statements within a spreadsheet, following the design in the
book. Then carry out the financial statement analysis to identify the relevant drivers for forecasting.
Next forecast future financial statements and develop a valuation from the forecasts.
Work with the textbook beside you. The most relevant part of the text is Chapter 7 to Chapter 16,
where financial statement analysis and valuation are covered in detail. Nike Inc. serves as an example
of the application techniques described in the chapters. This case utilizes Nike's financials for 2000-
2010.
The steps:
1. Download financial statements
2. Reformulate financial statements

Statements of shareholders' equity
Income statements
Balance sheets
Financial Statement Analysis and Security Valuation: Roadmap Stephen H. Penman 2003
Statements of cash flows
3. Financial statement analysis

Ratios based on reformulated financial statements
Analysis of profitability
Analysis of growth
Common size and trend analysis
4. Forecasting and valuation

Valuation essentials
Simple forecasting and valuation
Full-information forecasts and valuation
5. Bells and whistles
The sections in this primer cover these steps in order.
Stephen Penman 2012
Step 1: Download Financial Statements
The US Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (SEC
EDGAR) system provides electronic access to companies' financial reports. Access a company through
EDGAR at http://www.sec.gov/edgar/searchedgar/companysearch.html Several more intelligent interfaces
to the EDGAR database have been developed, which enable the downloading of the individual financial
statements directly to a spreadsheet program like Microsoft Excel. Three of these are:
1. EDGARscan developed by PricewaterhouseCoopers at http://edgarscan.pwcglobal.com;

2. 10k Wizard at http://www.10kwizard.com;
3. Edgar Online at http://www.sec.gov/edgar/searchedgar/companysearch.html
These sites require subscriptions, however.

All these websites allow searches for companies using either company name or its ticker. You can then
select the reports you need. Most of the time, you need the annual 10K reports that contain annual financial
statements. You can find the financial statements within the annual 10K reports and will see instructions on
how to extract them into Excel files. As each annual report contains financial statements for the year and
one or two years before, you will need to go back to another annual reports of the company to get financial
statements for a longer period. Individual spreadsheet files can then be merged into the format you like.
Stephen Penman 2012
Step 2: Reformulation
Analysis begins with the reformulation of financial statements. Reformulation readies the statements for
analysis within a spreadsheet. The aim is to:
Separate operating and financing items in the statements
Bring additional information into the statements from footnotes and elsewhere. The financial
statements aggregate a lot of information (particularly the income statements). Break down the
aggregation to give more detail.
Allocate taxes in the income statement to operating and financing activities
Distinguish different components of income such as core operating income from sales, other core
operating income, and unusual items
Before beginning, make sure you understand the reformulation template in Chapter 8 of the book. Chapters
8-11 cover the rules and principles for reformulation.
Spreadsheet programs like Excel allows you to use either the simple copy-and-paste method or the formula
method to manipulate the financial statements when doing the reformulation.
In the next section, the reformulated statements of shareholders' equity, balance sheets, income statements,
and cash flow statements for Nike Inc. for 2000-2010 are given next to the original statements. Note the
following points on the reformulation:
(a) Unearned stock compensation that arose from issuing shares to employees in fiscal year 2004 is an
operating asset, so is moved from the statement of shareholders' equity to the balance sheet. This is like
prepaid wages and is amortized to the income statement over a service period.
(b) Cash and cash equivalents in the balance sheets are split between a portion for operating needs and
investment of excess cash in financial assets
(c) Some additional expense items have been added to the income statements from the footnotes.
(d) Core and unusual operating items have been distinguished in the income statements.
(e) The tax allocation in the income statements involves not only allocating taxes between operating and
financing activities but also between core operating income and the restructuring charges. Note that foreign
currency translation gains and losses are already after tax.
Stephen Penman 2012
Summary of reformulation steps
1. Statement of Shareholders' Equity
1) Restate beginning and ending balances for items incorrectly included in or excluded from common
equity
-Preferred stock (take out from SE and include in "financial liabilities" in B/S).
+Dividends payable (take out from "accrued liabilities" in B/S and include in SE)
- Noncontrolling interest
2) Calculate net transactions with shareholders

= Cash dividends +share repurchases - share issues
(Cash dividends = dividends declared - change in dividends payable)
3) Calculate comprehensive income

= Net income +"other comprehensive income"
-Earnings from accounting changes
-Preferred dividends
-Hidden dirty-surplus losses
2. Balance Sheet
1) Classify GAAP assets and liabilities accounts into 4 categories: OA, FA, OL, FL
2) Regroup accounts under NOA (OA, OL) and NFA (FA, FL)
3) Refer to comments in the NIKE example to make adjustments for specific accounts
3. Income Statement
1) Reclassify GAAP income and expense items into core operating, non-core operating, and financial
activities
2) Read footnotes carefully for income and expense items to find any non-core activities incorrectly
classified under core activities
3) Account for tax effects in reclassifying incomes and expense items to make them after-tax basis
4) Bring "other comprehensive income" from the Statement of Shareholders' Equity. Most of them go
under non-core operating activities. No need to account for tax for these since they are after-tax basis
4. Statement of Cash Flows

No need to make major adjustments. Derive Free Cash Flow under two different methods.
5. Reformulation Checks
Link accounts from four statements to ensure that numbers are reconciled according to the equations in
Chapter 7.
Chapter 8.
Notes:
Pre-2006, for Shareholder's Equity, we need to adjust for equity from stock compensation ("unearned
stock compensation"), which is take out from SE and include in prepaid expenses.
Financial Statement Analysis and Security Valuation (Fifth Edition)
Stephen Penman 2012
2.1. Reformulation of the Statement of Shareholders' Equity
NIKE INC. STATEMENT OF SHAREHOLDERS' EQUITY

(in millions)
COMMON STOCK
CLASS A CLASS B CAPITAL IN ACCUMULATED
EXCESS OF OTHER
STATED UNEARNED STOCK COMPREHENSIVE RETAINED
in millions SHARES AMOUNT SHARES AMOUNT VALUE COMPENSATION INCOME EARNINGS TOTAL
BALANCE AT MAY 31, 1999 100.7 0.2 181.6 2.7 334.1 - (68.9) 3,066.5 3,334.6
Stock options exercised 1.3 38.7 38.7
Conversion to Class B Common Stock (1.5) 1.5
Repurchase of Class B Common (14.5) (0.1) (17.3) (627.1) (644.5)
Dividends on Common Stock (131.5) (131.5)
Issuance of shares to employees 0.5 13.5 (13.5) -
Amortization of unearned compensation 1.8 1.8
Comprehensive Income:
Net income 579.1 579.1
Foreign currency translation (42.2) (42.2)
Comprehensive Income (42.2) 579.1 536.9
BALANCE AT MAY 31, 2000 99.2 0.2 170.4 2.6 369.0 (11.7) (111.1) 2,887.0 3,136.0
Conversion to Class B Common Stock (0.1) 0.1 -
Repurchase of Class B Common (4.0) (4.8) (152.2) (157.0)
Issuance of shares to employees 0.1 6.7 (6.7) -
Forfeiture of shares from employees (2.5) 1.2 (0.6) (1.9)
BALANCE AT MAY 31, 2001 99.1 0.2 169.5 2.6 459.4 (9.9) (152.1) 3,194.3 3,494.5
Issuance of shares to employees 0.2 13.2 (1.9) 11.3
Forfeiture of shares from employees (0.1) (1.6) 0.2 (1.5) (2.9)
Cumulative effect of change in accounting principle 56.8 56.8
Adjustment for fair value of hedge derivatives (95.6) (95.6)
BALANCE AT MAY 31, 2002 98.1 0.2 168.0 2.6 538.7 (5.1) (192.4) 3,495.0 3,839.0
Forfeiture of shares from employees (0.1) (2.7) 1.0 (0.9) (2.6)
Foreign currency translation 127.4 127.4
Adjustment for fair value of hedge derivatives (174.7) (174.7)
BALANCE AT MAY 31, 2003 97.8 0.2 165.8 2.6 589.0 (0.6) (239.7) 3,639.2 3,990.7
Conversion to Class B Common Stock (20.2) (0.1) 20.2 0.1
Forfeiture of shares from employees (1.7) (0.3) (2.0)
Foreign currency translation 27.5 27.5
Adjustment for fair value of hedge derivatives 125.9 125.9
Comprehensive Income 153.4 945.6 1,099.0
BALANCE AT MAY 31, 2004 77.6 0.1 185.5 2.7 887.8 (5.5) (86.3) 3,982.9 4,781.7
Balance at May 31, 1999 3,334.6
Transactions with Shareholders
Stock issues for stock options 63.7
Stock issued to employee 13.5
Stock repurchases (644.5)
Common dividends (131.5) (698.8)
Comprehensive income
Net income reported 579.1
Net translation gain (loss) (42.2)
Loss on option exercise (39.9)
Tax benefit 14.9 (25.0) 511.9
Balance at May 31, 2000 3,147.7

Tax benefit 32.4 (54.2) 494.5
Balance at May 31, 2001 3,504.4

Net hedging gain (loss) (95.6)
Adjustment for Accounting Changes 56.8
Tax benefit 13.9 (23.5) 599.5
Balance at May 31, 2002 3,844.1
Stephen Penman 2012
2.2. Reformulation of Balance Sheets
NIKE INC. BALANCE SHEETS

(in millions)
CLASSIFICATION 2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31 2002/05/31 2001/05/31 2000/05/31
ASSETS
Current Assets:
Cash and equivalents OA & FA $3,079.1 $2,291.1 $2,133.9 $1,856.7 $954.2 $1,388.1 $828.0 $634.0 $575.5 $304.0 $254.3
Short-term investments FA 2,066.8 1,164.0 642.2 990.3 1,348.8 436.6 400.8 - - - -
Accounts receivable, net OA 2,649.8 2,883.9 2,795.3 2,494.7 2,395.9 2,262.1 2,120.2 2,083.9 1,804.1 1,621.4 1,567.2
Inventories OA 2,040.8 2,357.0 2,438.4 2,121.9 2,076.7 1,811.1 1,650.2 1,514.9 1,373.8 1,424.1 1,446.0
Deferred income taxes OA 248.8 272.4 227.2 219.7 203.3 110.2 165.0 221.8 140.8 113.3 111.5
Income taxes receivable OA - - - - 2.2
Prepaid expenses and other current assets OA 873.9 765.6 602.3 393.2 380.1 343.0 364.4 332.5 260.5 162.5 215.2
Total current assets 10,959.2 9,734.0 8,839.3 8,076.5 7,359.0 6,351.1 5,528.6 4,787.1 4,154.7 3,625.3 3,596.4
Property, plant and equipment, net OA 1,931.9 1,957.7 1,891.1 1,678.3 1,657.7 1,605.8 1,611.8 1,620.8 1,614.5 1,618.8 1,583.4
Goodwill OA 187.6 193.5 448.8 130.8 130.8 135.4 135.4 65.6 232.7 178.7 195.7
Identifiable intangible assets OA 467.0 467.4 743.1 409.9 405.5 406.1 366.3 118.2 206.0 218.6 215.2
Deferred income taxes and other assets OA 873.6 897.0 520.4 392.8 316.6 295.2 266.6 229.4 232.1 178.2 266.2
Total assets 14,419.3 13,249.6 12,442.7 10,688.3 9,869.6 8,793.6 7,908.7 6,821.1 6,440.0 5,819.6 5,856.9
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt FL 7.4 32.0 6.3 30.5 255.3 6.2 6.6 205.7 55.3 5.4 50.1
Notes payable FL 138.6 342.9 177.7 100.8 43.4 69.8 146.0 75.4 425.2 855.3 924.2
Accounts payable OL 1,254.5 1,031.9 1,287.6 1,040.3 952.2 843.9 780.4 572.7 504.4 432.0 543.8
Accrued liabilities OL 1,904.4 1,783.9 1,761.9 1,303.4 1,286.9 984.3 979.3 1,036.2 765.3 472.1 621.9
Income taxes payable OL 59.3 86.3 88.0 109.0 85.5 95.0 118.2 130.6 83.0 21.9 -
Total current liabilities 3,364.2 3,277.0 3,321.5 2,584.0 2,623.3 1,999.2 2,030.5 2,020.6 1,833.2 1,786.7 2,140.0
Long-term debt FL 445.8 437.2 441.1 409.9 410.7 687.3 682.4 551.6 625.9 435.9 470.3
Deferred income taxes and other liabilities OL 855.3 842.0 854.5 668.7 550.1 462.6 413.8 257.9 141.6 102.2 110.3
Redeemable Preferred Stock FL 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Shareholders' Equity:
Common Stock at stated value:
Class A convertible 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2
Class B 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.6 2.6 2.6 2.6
Capital in excess of stated value 3,440.6 2,871.4 2,497.8 1,960.0 1,451.4 1,182.9 887.8 589.0 538.7 459.4 369.0
Unearned stock compensation OA (4.1) (11.4) (5.5) (0.6) (5.1) (9.9) (11.7)
Accumulated other comprehensive income 214.8 367.5 251.4 177.4 121.7 73.4 (86.3) (239.7) (192.4) (152.1) (111.1)
Retained earnings 6,095.5 5,451.4 5,073.3 4,885.2 4,713.4 4,396.5 3,982.9 3,639.2 3,495.0 3,194.3 2,887.0
Total shareholders' equity CSE 9,753.7 8,693.1 7,825.3 7,025.4 6,285.2 5,644.2 4,781.7 3,990.7 3,839.0 3,494.5 3,136.0
Total liabilities and shareholders' equity 14,419.3 13,249.6 12,442.7 10,688.3 9,869.6 8,793.6 7,908.7 6,821.1 6,440.0 5,819.6 5,856.9
Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

NIKE INC. REFORMULATED BALANCE SHEETS
(in millions)
2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31

Net operating assets (NOA):
Operating assets
Cash and equivalents $95.1 $95.9 $93.1 $81.6 $74.8 $68.7 $61.3
Accounts receivable, less allowance for doubtful accounts 2,649.8 2,883.9 2,795.3 2,494.7 2,395.9 2,262.1 2,120.2
Inventories 2,040.8 2,357.0 2,438.4 2,121.9 2,076.7 1,811.1 1,650.2
Prepaid expenses and other current assets 873.9 765.6 602.3 393.2 384.2 354.4 369.9
Property, plant and equipment, net 1,931.9 1,957.7 1,891.1 1,678.3 1,657.7 1,605.8 1,611.8
Goodwill 187.6 193.5 448.8 130.8 130.8 135.4 135.4
Identifiable intangible assets 467.0 467.4 743.1 409.9 405.5 406.1 366.3
Deferred income taxes and other assets 1,122.4 1,169.4 747.6 612.5 519.9 405.4 431.6
Total operating assets 9,368.5 9,890.4 9,759.7 7,922.9 7,645.5 7,049.0 6,746.7
Operating liabilities
Accounts payable - non-interest bearing 1,166.3 953.4 1,221.7 995.7 882.5 790.8 736.5
Accrued liabilities 1,773.7 1,662.5 1,649.0 1,210.5 1,207.5 919.0 926.7
Income taxes payable 59.3 86.3 88.0 109.0 85.5 95.0 118.2
Deferred income taxes and other liabilities 855.3 842.0 854.5 668.7 550.1 462.6 413.8
Total operating liabilities 3,854.6 3,544.2 3,813.2 2,983.9 2,725.6 2,267.4 2,195.2
Net operating assets (NOA): 5,513.9 6,346.2 5,946.5 4,939.0 4,919.9 4,781.6 4,551.5
Net financial assets (obligations) (NFA/NFO):

Financial assets
Cash equivalent 2,984.0 2,195.2 2,040.8 1,775.1 879.4 1,319.4 766.7
Short-term investments 2,066.8 1,164.0 642.2 990.3 1,348.8 436.6 400.8
Total financial assets 5,050.8 3,359.2 2,683.0 2,765.4 2,228.2 1,756.0 1,167.5
Financial liabilities
Current portion of long-term debt 7.4 32.0 6.3 30.5 255.3 6.2 6.6
Notes payable 138.6 342.9 177.7 100.8 43.4 69.8 146.0
Accounts payable - interest bearing 88.2 78.5 65.9 44.6 69.7 53.1 43.9
Long-term debt 445.8 437.2 441.1 409.9 410.7 687.3 682.4
Redeemable Preferred Stock 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Total financial liabilities 680.3 890.9 691.3 586.1 779.4 816.7 879.2
Net financial assets (obligations) (NFA/NFO) 4,370.5 2,468.3 1,991.7 2,179.3 1,448.8 939.3 288.3
Common Shareholders' Equity (CSE) 9,884.4 8,814.5 7,938.2 7,118.3 6,368.7 5,720.9 4,839.8

for the year ended 2010/05/29 2009/05/30 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31 2002/05/31
Operating revenue $19,014.0 $19,176.1 $18,627.0 $16,325.9 $14,954.9 $13,739.7 $12,253.1 $10,697.0 $9,893.0
Cost of sales 10,213.6 10,571.7 10,239.6 9,165.4 8,367.9 7,624.3 7,001.4 6,313.6 6,004.7
Gross margin 8,800.4 8,604.4 8,387.4 7,160.5 6,587.0 6,115.4 5,251.7 4,383.4 3,888.3
Operating expenses
Administrative expenses 3,956.5 3,786.4 3,636.2 3,106.4 2,727.8 2,611.7 2,312.1 1,967.2 1,789.9
Advertising 2,356.4 2,351.3 2,308.3 1,912.4 1,740.2 1,600.7 1,377.9 1,166.8 1,027.9
Amortization of identifiable intangibles 13.5 11.9 9.2 9.9 9.8 9.3 12.0 3.6 2.6
Other expense, net (49.2) (88.5) 68.5 (0.9) 4.4 29.1 74.7 79.9 3.0
Total operating expenses 6,277.2 6,061.1 6,022.2 5,027.8 4,482.2 4,250.8 3,776.7 3,217.5 2,823.4
Core operating income (before tax) 2,523.2 2,543.3 2,365.2 2,132.7 2,104.8 1,864.6 1,475.0 1,165.9 1,064.9
Tax on operating income
Tax as reported 610.2 469.8 619.5 708.4 749.6 648.2 504.4 382.9 349.0
Tax on other operating income - 215.9 (22.1) - - - - - -
Tax benefit from net interest expenses 2.3 (3.4) (28.1) (24.6) (13.4) 1.7 9.3 16.1 17.7
Total tax on operating income 612.5 682.2 569.4 683.8 736.2 649.9 513.7 399.0 366.7
Core operating income (after tax) 1,910.7 1,861.1 1,795.8 1,448.9 1,368.6 1,214.7 961.3 766.9 698.2
Other operating income (expense) (before tax)
Gains on divestitures 60.6
Impairment (401.3)
Restructuring charge, net (195.0)
Tax on other operating income 215.9 (22.1)
(380.4) 38.5
Other operating income (expense) (after tax)
Currency translation gains (loss) (159.2) (335.3) 165.6 84.6 87.1 70.1 27.5 127.4 (1.5)
Net hedging gain (loss) 6.5 451.4 (91.6) (16.7) (38.8) 89.6 125.9 (174.7) (95.6)
Adjustment for Accounting Changes (25.7) (12.2) (266.1) 51.8
Effect of stock option exercise 56.3 126.4 30.9 51.0 (94.3) (110.3) (80.0) (20.8) (23.5)
Total other operating income (expense) (96.4) (138.0) 117.8 106.7 (46.0) 49.4 73.4 (334.2) (68.8)
Operating income after tax 1,814.4 1,723.1 1,913.6 1,555.6 1,322.6 1,264.1 1,034.7 432.7 629.4
Financial income (NFE)

Interest expense (36.4) (40.2) (38.7) (49.7) (50.5) (39.7) (40.3) (57.0) (61.2)
Interest income 30.1 49.7 115.8 116.9 87.3 34.9 15.3 14.1 13.6
Net interest Income (expense) before tax (6.3) 9.5 77.1 67.2 36.8 (4.8) (25.0) (42.9) (47.6)
Tax benefit of debt 2.3 (3.4) (28.1) (24.6) (13.4) 1.7 9.3 16.1 17.7
Net financial income (expense) (4.0) 6.1 49.0 42.6 23.4 (3.1) (15.7) (26.8) (29.9)
Comprehensive income (available to common) 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5
Stephen Penman 2012
2.4. Reformulation of the Statement of Cash Flows
NIKE INC. STATEMENT OF CASH FLOWS

in millions
year ended 2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31 2002/05/31 2001/05/31 2000/05/31
Cash provided (used) by operations:
Net income $1,906.7 $1,486.7 $1,883.4 $1,491.5 $1,392.0 $1,211.6 $945.6 $474.0 $663.3 $589.7 $579.1
Income charges (credits) not affecting cash:
Cumulative effect of accounting change - - - - 266.1 5.0 - -
Depreciation 323.7 335.0 303.6 269.7 282.0 257.2 255.2 239.3 223.5 197.4 188.0
Stock-based compensation 159.0 170.6 141.0 147.7 11.8
Impairment of goodwill, intangibles and other assets 401.3
Non-cash portion of restructuring charge (60.6) - - - - -
Deferred income taxes 8.3 (294.1) (300.6) 34.1 (26.0) 21.3 19.0 50.4 15.2 79.8 36.8
Amortization and other 71.8 48.3 17.9 0.5 (2.9) 30.5 58.3 23.2 48.1 16.7 35.6
Income tax benefit from exercise of stock options - - - - 54.2 63.1 47.2 12.5 13.9 32.4 14.9
Changes in certain working capital components:
Increase in inventories 284.6 32.2 (249.8) (49.5) (200.3) (103.3) (55.9) (136.3) 55.4 (16.7) 311.8
Decrease (increase) in accounts receivable 181.7 (238.0) (118.3) (39.6) (85.1) (93.5) 97.1 (102.8) (135.2) (141.4) (82.6)
Decrease (increase) in other current assets and
income taxes receivable (69.6) 14.1 (11.2) (60.8) (37.2) 71.4 (103.6) 60.9 16.9 78.0 61.2
(Decrease) increase in accounts payable, accrued
liabilities and income taxes payable 298.0 (220.0) 330.9 85.1 279.4 112.4 255.6 30.1 175.4 (179.4) 178.4
Cash provided by operations 3,164.2 1,736.1 1,936.3 1,878.7 1,667.9 1,570.7 1,518.5 917.4 1,081.5 656.5 699.6
Cash provided (used) by investing activities:
Purchases of short-term investments (3,724.4) (2,908.7) (1,865.6) (2,133.8) (2,619.7) (1,527.2) (400.8) - - - -
Maturities of short-term investments 2,787.6 2,390.0 2,246.0 2,516.2 1,709.8 1,491.9
Additions to property, plant and equipment (335.1) (455.7) (449.2) (313.5) (333.7) (257.1) (214.8) (185.9) (282.8) (317.6) (419.9)
Disposals of property, plant and equipment 10.1 32.0 1.9 28.3 1.6 7.2 11.6 14.8 15.6 12.7 25.3
Increase in other assets (11.2) (47.0) (21.8) (4.3) (34.6) (39.1) (53.4) (46.3) (39.1) (42.5) (51.3)
Increase (decrease) in other liabilities - 11.1 (4.1) 1.8 3.5 5.1 5.9
Settlement of net investment hedges 5.5 191.3 (76.0)
Acquisition of subsidiary, net of cash acquired (571.1) - - (47.2) (289.1) - - - -
Proceeds from divesture 246.0

Cash used by investing activities (1,267.5) (798.1) (489.8) 92.9 (1,276.6) (360.4) (950.6) (215.6) (302.8) (342.3) (440.0)
Cash provided (used) by financing activities:
Additions to long-term debt - - - 41.8 - - 153.8 90.4 329.9 - -
Reductions in long-term debt including current portion (32.2) (6.8) (35.2) (255.7) (6.0) (9.2) (206.6) (55.9) (80.3) (50.3) (1.7)
(Decrease) increase in notes payable (205.4) 177.1 63.7 52.6 (18.2) (81.7) (0.3) (349.8) (431.5) (68.9) 505.1
Proceeds from exercise of options and other stock
issuances 364.5 186.6 343.3 322.9 225.3 226.8 253.6 44.2 59.5 56.0 23.9
Excess tax benefits from share-based payment
arrangements 58.5 25.1 63.0 55.8

Repurchase of stock (741.2) (649.2) (1,248.0) (985.2) (761.1) (556.2) (419.8) (196.3) (226.9) (157.0) (646.3)
Dividends--common and preferred (505.4) (466.7) (412.9) (343.7) (290.9) (236.7) (179.2) (137.8) (128.9) (129.7) (133.1)
Cash (used) provided by financing activities (1,061.2) (733.9) (1,226.1) (1,111.5) (850.9) (657.0) (398.5) (605.2) (478.2) (349.9) (252.1)
Effect of exchange rate changes on cash (47.5) (46.9) 56.8 42.4 25.7 6.8 24.6 (38.1) (29.0) 85.4 48.7
Net (decrease) increase in cash and equivalents 788.0 157.2 277.2 902.5 (433.9) 560.1 194.0 58.5 271.5 49.7 56.2
Cash and equivalents, beginning of year 2,291.1 2,133.9 1,856.7 954.2 1,388.1 828.0 634.0 575.5 304.0 254.3 198.1
Cash and equivalents, end of year 3,079.1 2,291.1 2,133.9 1,856.7 954.2 1,388.1 828.0 $634.0 $575.5 $304.0 $254.3
Supplemental disclosure of cash flow information:

Cash paid during the year for:
Interest (net of amount capitalized) $48.4 $46.7 $44.1 $60.0 $54.2 $33.9 $37.8 $38.9 $54.2 $68.5 $45.0
Income taxes 537.2 765.2 717.5 601.1 752.6 585.3 418.6 330.2 262.0 173.1 221.1
Non-cash investing and financing activity:
Assumption of long-term debt to acquire property, plant,
and equipment $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $108.9

Nike: Calculation of Free Cash Flow Using Reformulated Statements
Year ended May 31, 2010
Method 1:
C - I = OI - change in NOA
Operating income, 2010 1,814.4

NOA, 2010 5,513.9
NOA, 2009 6,346.2 (832.3)
Free cash flow 2,646.7
Method 2:
C - I = NFE + Change in NFA + d
NFE, 2010 4.0

NFA, 2010 4,370.5
NFA, 2009 2,468.3 1,902.2
Net dividend, 2010 740.4
Free cash flow 2,646.7

Stephen Penman 2012
2.5. Reformulation Check
FYE 2010/5/31 2009/5/31 2008/5/31 2007/5/31 2006/5/31 2005/5/31 2004/5/31 2003/5/31 2002/5/31 2001/5/31 2000/5/31
Ref stmt of shareholders equity 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5 494.5 511.9
Income statement 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5 494.5 511.9
Difference 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
GAAP net income 1,906.7 1,486.7 1,883.4 1,491.5 1,392.0 1,211.6 945.6 474.0 663.3 589.7 579.1
Dirty-surplus items (96.4) 242.5 79.2 106.7 (46.0) 49.4 73.4 (68.1) (63.8) (95.2) (67.2)
Adjusted GAAP Net Income 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5 494.5 511.9
Income Statement 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5 494.5 511.9
Difference 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Ending CSE
Ref stmt of shareholders equity 9,884.4 8,814.5 7,938.2 7,118.3 6,368.7 5,720.9 4,839.8 4,028.2 3,844.1 3,504.4 3,147.7
Balance sheet 9,884.4 8,814.5 7,938.2 7,118.3 6,368.7 5,720.9 4,839.8 4,028.2 3,844.1 3,504.4 3,147.7
Difference 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Stephen Penman 2012
Step 3: Financial Statement Analysis
3.1 Analysis of Profitability and Growth
NIKE, year ended May 31, 2010

A systematic analysis of profitability
Summary measure ROCE RNOA

19.36% 30.60%
First level breakdown RNOA+[FLEV*(RNOA-NBC)]

19.36%
Second level breakdown RNOA = PM*ATO

30.60%
PM = OI / Sales ATO = Sales / NOA
9.54% 3.21
Third level breakdown
individual revenue and expense ratios - seen from common size analysis
A systematic analysis of growth
NIKE Inc. Summary information from balance sheets and income statements
2010 2009 2008 2007 2006 2005 2004 2003 2002
Average NOA 5,930.0 6,146.4 5,442.8 4,929.5 4,850.7 4,666.5 4,440.9 4,395.7 4,518.1
Average NFA 3,419.4 2,230.0 2,085.5 1,814.0 1,194.1 613.8 (6.9) (459.5) (843.9)
Average CSE 9,349.5 8,376.4 7,528.3 6,743.5 6,044.8 5,280.4 4,434.0 3,936.2 3,674.3
Sales 19,014.0 19,176.1 18,627.0 16,325.9 14,954.9 13,739.7 12,253.1 10,697.0 9,893.0
Core operating income 1,910.7 1,861.1 1,795.8 1,448.9 1,368.6 1,214.7 961.3 766.9 698.2
Unusual items (96.4) (138.0) 117.8 106.7 (46.0) 49.4 73.4 (334.2) (68.8)
Operating income 1,814.4 1,723.1 1,913.6 1,555.6 1,322.6 1,264.1 1,034.7 432.7 629.4
Comprehensive income 1,810.3 1,729.2 1,962.6 1,598.2 1,346.0 1,261.0 1,019.0 405.9 599.5
Net financial income (expense) (4.0) 6.1 49.0 42.6 23.4 (3.1) (15.7) (26.8) (29.9)
ROCE 19.36% 20.64% 26.07% 23.70% 22.27% 23.88% 22.98% 10.31% 16.32%
RNOA 30.60% 28.03% 35.16% 31.56% 27.27% 27.09% 23.30% 9.84% 13.93%
NBC -0.12% 0.27% 2.35% 2.35% 1.96% -0.50% 228.72% 5.83% 3.54%
PM 9.54% 8.99% 10.27% 9.53% 8.84% 9.20% 8.44% 4.04% 6.36%
Core sales PM 10.05% 9.71% 9.64% 8.87% 9.15% 8.84% 7.85% 7.17% 7.06%
ATO 3.21 3.12 3.42 3.31 3.08 2.94 2.76 2.43 2.19
FLEV -36.57% -26.62% -27.70% -26.90% -19.75% -11.62% 0.16% 11.67% 22.97%
SPREAD 30.71% 27.76% 32.81% 29.21% 25.31% 27.59% -205.42% 4.01% 10.39%
* Balance sheet numbers are averages for the year.
Nike Residual Earnings Growth: 2002-2010
Residual earnings [ROCEt - Cost of Equity Capitalt]*CSEt
2006 2007 2008 2007 2006 2005 2004 2003 2002

Revenue growth rate -0.85% 2.95% 14.09% 9.17% 8.84% 12.13% 14.55% 8.13% 4.26%
Growth in CSE 11.62% 11.27% 11.64% 11.56% 14.48% 19.09% 12.65% 7.13% 10.47%
Growth in comprehensive income 4.69% -11.90% 22.80% 18.74% 6.74% 23.76% 151.06% -32.30% 21.25%
Residual earnings (at cost of
1015.64 1017.17 1322.72 1025.04 832.20 812.22 642.09 71.29 287.22
equity of 8.50%)
A systematic analysis of the change in ROCE
Analysis of change in RNOA
Level 1: Distinguish core and unusual components of RNOA

RNOA = Core OI / NOA + UI / NOA check
30.60% 32.22% -1.62% 30.60%
Change in core sales Change due to Change due to Change due to

Level 2: Change in RNOA = PM at previous asset change in asset change in other core change in unusual
turnover level + turnover + income + items
2.56% 1.07% 0.87% 0 0.62%
Analysis of changes in ROCE
Change due to
change in spread at Change due to
Change in RNOA
Change in ROCE = previous level of change in financial
+
financial leverage leverage
+
-1.28% 2.56% -0.79% -3.06%
A systematic analysis of the change in investment (CSE)
Change in CSE = Change in NOA + Change in NFA

1069.9 -832.3 1902.2
NOA = Sales / ATO

5,930.0 5,930.0
Change due to Change due to

change in sales at change in asset Change in financial
Change in CSE =
previous level of turnover assets
asset turnover + +
973.1 (52.0) -164.4 1189.4
Stephen Penman 2012
Step 3: Financial Statement Analysis
3.2 Common size and trend analysis
Common size and trend analysis helps understand the business and how it changes over time. It is a useful step in financial statement analysis in preparation for full-
information forecasting and valuation.
Nike Inc.
Common size analysis of income statements
for the year ended 2010/05/29 2009/05/30 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31 2002/05/31 2001/05/31 2000/05/31
Operating revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales 54% 55% 55% 56% 56% 55% 57% 59% 61% 61% 60%
Gross margin 46% 45% 45% 44% 44% 45% 43% 41% 39% 39% 40%
Operating expenses
Administrative expenses 21% 20% 20% 19% 18% 19% 19% 18% 18% 18% 18%
Advertising 12% 12% 12% 12% 12% 12% 11% 11% 10% 11% 11%
Amortization of identifiable intangibles 0.1% 0.1% 0.0% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.2%
Other expense, net -0.3% -0.5% 0.4% 0.0% 0.0% 0.2% 0.6% 0.7% 0.0% 0.4% 0.3%
Total operating expenses 33% 32% 32% 31% 30% 31% 31% 30% 29% 29% 29%
Core operating income (before tax) 13% 13% 13% 13% 14% 14% 12% 11% 11% 10% 11%
Tax as reported 3.2% 2.4% 3.3% 4.3% 5.0% 4.7% 4.1% 3.6% 3.5% 3.5% 3.8%
Tax on other operating income 0.0% 1.1% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Tax benefit from net interest expenses 0.0% 0.0% -0.2% -0.2% -0.1% 0.0% 0.1% 0.2% 0.2% 0.2% 0.2%
Total tax on operating income 3.2% 3.6% 3.1% 4.2% 4.9% 4.7% 4.2% 3.7% 3.7% 3.7% 4.0%
Core operating income (after tax) 10% 10% 10% 9% 9% 9% 8% 7% 7% 7% 7%
Gains on divestitures 0.3%
Impairment -2.1%
Restructuring charge, net -1.0% 0.0%
Tax on other operating income 1.1% -0.1% 0.0%
-2.0% 0.2% 0.0%
Currency translation gains (loss) -0.8% -1.7% 0.9% 0.5% 0.6% 0.5% 0.2% 1.2% 0.0% -0.4% -0.5%
Net hedging gain (loss) 0.0% 2.4% -0.5% -0.1% -0.3% 0.7% 1.0% -1.6% -1.0% 0.0% 0.0%
Adjustment for Accounting Changes 0.0% 0.0% -0.1% -0.1% 0.0% 0.0% 0.0% -2.5% 0.5% 0.0% 0.0%
Effect of stock option exercise 0.3% 0.7% 0.2% 0.3% -0.6% -0.8% -0.7% -0.2% -0.2% -0.6% -0.3%
Total other operating income (expense) -0.5% 1.3% 0.4% 0.7% -0.3% 0.4% 0.6% -3.1% -0.7% -1.0% -0.7%
Operating income after tax 9.5% 11.0% 10.1% 9.5% 8.8% 9.2% 8.4% 4.0% 6.4% 5.6% 6.0%
Nike Inc.
Trend analysis of income statements
for the year ended 2010/05/29 2009/05/30 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31
Operating revenue 211% 213% 207% 181% 166% 153% 136% 119%
Cost of sales 189% 196% 189% 170% 155% 141% 130% 117%
Gross margin 245% 240% 234% 199% 183% 170% 146% 122%
Operating expenses
Administrative expenses 246% 235% 226% 193% 169% 162% 144% 122%
Advertising 241% 240% 236% 196% 178% 164% 141% 119%
Amortization of identifiable intangibles 73% 64% 50% 54% 53% 50% 65% 19%
Other expense, net -212% -381% 295% -4% 19% 125% 322% 344%
Total operating expenses 239% 230% 229% 191% 170% 162% 144% 122%
Core operating income (before tax) 262% 264% 246% 222% 219% 194% 153% 121%
Tax as reported
Tax on other operating income
Tax benefit from net interest expenses
Total tax on operating income 172% 192% 160% 192% 207% 183% 144% 112%
Core operating income (after tax) 315% 307% 296% 239% 226% 201% 159% 127%
Gains on divestitures
Impairment
Restructuring charge, net
Tax on other operating income

Currency translation gains (loss)
Net hedging gain (loss)
Adjustment for Accounting Changes
Effect of stock option exercise
Total other operating income (expense) 147% 210% -179% -163% 70% -75% -112% 509%
Operating income after tax 336% 319% 354% 288% 245% 234% 192% 80%

Interest expense
Interest income
NIKE Inc.
Common size analysis of balance sheets
2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31 2002/05/31 2001/05/31 2000/05/31
Operating assets
Cash and equivalents 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1%
Accounts receivable, less allowance for doubtful accounts 28% 29% 29% 31% 31% 32% 31% 33% 30% 29% 28%
Inventories 22% 24% 25% 27% 27% 26% 24% 24% 23% 26% 26%
Prepaid expenses and other current assets 9% 8% 6% 5% 5% 5% 5% 5% 4% 3% 4%
Property, plant and equipment, net 21% 20% 19% 21% 22% 23% 24% 26% 27% 29% 28%
Goodwill 2% 2% 5% 2% 2% 2% 2% 1% 4% 3% 3%
Identifiable intangible assets 5% 5% 8% 5% 5% 6% 5% 2% 3% 4% 4%
Deferred income taxes and other assets 12% 12% 8% 8% 7% 6% 6% 7% 6% 5% 7%
Total operating assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Accounts payable - non-interest bearing 30% 27% 32% 33% 32% 35% 34% 27% 32% 40% 40%
Accrued liabilities 46% 47% 43% 41% 44% 41% 42% 52% 52% 47% 51%
Income taxes payable 2% 2% 2% 4% 3% 4% 5% 7% 6% 2% 0%
Deferred income taxes and other liabilities 22% 24% 22% 22% 20% 20% 19% 13% 10% 10% 9%
Total operating liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Financial assets
Cash equivalent 59% 65% 76% 64% 39% 75% 66% 100% 100% 100% 100%
Short-term investments 41% 35% 24% 36% 61% 25% 34% 0% 0% 0% 0%
Total financial assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Current portion of long-term debt 1% 4% 1% 5% 33% 1% 1% 23% 5% 0% 3%
Notes payable 20% 38% 26% 17% 6% 9% 17% 9% 37% 64% 61%
Accounts payable - interest bearing 13% 9% 10% 8% 9% 7% 5% 6% 3% 2% 4%
Long-term debt 66% 49% 64% 70% 53% 84% 78% 62% 55% 33% 31%
Redeemable Preferred Stock 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Total financial liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
As percentage of CSE:
Net operating assets (NOA): 55.8% 72.0% 74.9% 69.4% 77.3% 83.6% 94.0% 107.5% 116.0% 130.6% 141.2%
Net financial assets (obligations) 44.2% 28.0% 25.1% 30.6% 22.7% 16.4% 6.0% -7.5% -16.0% -30.6% -41.2%
Common Shareholders' Equity (CSE) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Nike Inc.
Trend analysis of balance sheets
2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31 2003/05/31

Operating assets
Cash and equivalents 211% 213% 207% 181% 166% 153% 136% 119%
Accounts receivable, less allowance for doubtful accounts 169% 184% 178% 159% 153% 144% 135% 133%
Inventories 141% 163% 169% 147% 144% 125% 114% 105%
Prepaid expenses and other current assets 385% 337% 265% 173% 169% 156% 163% 147%
Property, plant and equipment, net 122% 124% 119% 106% 105% 101% 102% 102%
Goodwill 96% 99% 229% 67% 67% 69% 69% 34%
Identifiable intangible assets 217% 217% 345% 190% 188% 189% 170% 55%
Deferred income taxes and other assets 295% 308% 197% 161% 137% 107% 114% 119%
Total operating assets 166% 175% 172% 140% 135% 125% 119% 110%
Accounts payable - non-interest bearing 241% 197% 252% 206% 182% 163% 152% 108%
Accrued liabilities 285% 267% 265% 195% 194% 148% 149% 161%
Income taxes payable
Deferred income taxes and other liabilities 775% 763% 775% 606% 499% 419% 375% 234%
Total operating liabilities 317% 291% 314% 245% 224% 186% 181% 157%
Net operating assets (NOA): 124% 143% 134% 111% 111% 108% 102% 97%

Financial assets
Cash equivalent 1426% 1049% 975% 848% 420% 630% 366% 277%
Short-term investments
Total financial assets 2413% 1605% 1282% 1321% 1064% 839% 558% 277%
Current portion of long-term debt 15% 64% 13% 61% 510% 12% 13% 411%
Notes payable 15% 37% 19% 11% 5% 8% 16% 8%
Accounts payable - interest bearing 147% 131% 110% 74% 116% 89% 73% 83%
Long-term debt 95% 93% 94% 87% 87% 146% 145% 117%
Redeemable Preferred Stock 100% 100% 100% 100% 100% 100% 100% 100%
Total financial liabilities 45% 59% 46% 39% 52% 54% 58% 59%
Common-Size Income Statement Trend Analysis of Income Statement Items
Percent of Revenue
70%
Percent of 2000 Value

450%
Cost of sales
60% 400%
Core operating income (before tax)
Operating revenue
Total operating expenses 350%
50% Gross margin
Total other operating income (expense)
300% Core operating income (before tax)
Net financial income (expense)
40% Core operating income (after tax)
Operating income after tax 250%
Operating income after tax
30% Comprehensive income (available to
common) 200% Comprehensive income (available to
common)
20% 150%
10% 100%
50%
0%
2000/01/01 2003/01/01 2006/01/01 2009/01/01
0%
-10% 2000/01/01 2003/01/01 2006/01/01 2009/01/01
Trend Analysis of Balance Sheet Items

Common-Size Balance Sheet
Percent of Total CSE
Percent of 2000 Values

400%
200.0% Net operating assets (NOA):
Net financial assets (obligations) Net operating assets (NOA):
300% Net financial assets (obligations) (NFA/NFO)
Common Shareholders' Equity (CSE)
150.0%
200%
100.0% 100%
0%
50.0%
2000/01/01 2003/01/01 2006/01/01 2009/01/01
-100%
0.0%
2000/01/01 2003/01/01 2006/01/01 2009/01/01
-200%
-50.0%
-300%
-100.0% -400%
30.0% 4.0
3.5
25.0%
3.0
20.0%
2.5
RNOA
15.0% 2.0 PM
ATO
1.5
10.0%
1.0
5.0%
0.5
0.0% -
2010 2009 2008 2007 2006 2005 2004 2003 2002
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001
RNOA 19.4% 20.6% 26.1% 23.7% 22.3% 23.9% 23.0% 10.3% 16.3% 14.9%
PM 9.5% 9.0% 10.3% 9.5% 8.8% 9.2% 8.4% 4.0% 6.4% 5.6%
ATO 3.2 3.1 3.4 3.3 3.1 2.9 2.8 2.4 2.2 2.1
Stephen Penman 2012
Step 4: Projection and Valuation
4.1. Valuation essentials
Net income component Book value component Residual earnings components

Residual operating income: OIt -
Operating income (OI) Net operating assets (NOA)
(kF-1)*NOAt-1
Residual net financial expense:
Net financial expense (NFE) Net financial obligations (NFO) NFEt - (kD-1)NFOt-1
Common stockholders' equity Residual earnings: Earnt-(kE-

Earnings
(CSE) 1)*CSEt-1
Present value of expected residual

Value of operations = Net operating assets +
operating income
Present value of expected residual

Value of common equity = Book value of common equity +
operating income
Value of operations = Value of common equity + Value of net financial obligations
Discount rates
Denoted as Formula
Cost of capital for equity kE rf + beta*(rm-rf)
Cost of capital for debt kD NBC
Cost of operations kF kE*VE/VF + kD*VD/VF
For Nike in 2010

rish-free rate (10-year Treasury rate) 3.6%
Beta 0.90
Market risk premium (rm-rf) 5.0%
kE 8.1%
kD 1.2% (Get borrowing rate from debt footnote (1.9%) and convert to after-tax basis (1.2%))
Number of shares 484.4
Nike's close price on August 10, 2010 $ 73.94
Market value of equity 35,817
Net Financial Obligation (4,371)
Market value of the firm 31,446
kF 9.1%
Stephen Penman 2012
4.2. Simple forecasts and simple valuations
No-Growth Valuation: Forecasts from earnings and book values Page 485
Forecasting earnings and its components by forecasting that earnings will be the same as in the current year,
adjusted for changes in the balance sheet earning at the required return.
No-Growth Forecast is assuming all future residual earnings are the same as in the current year.
No-Growth Forecast Valuations of Nike
Nike, Inc.
in millions except for per share data
Required return for operations 9.1%
Common shareholders' equity, 2010 9,884.4
Core operating income, 2010 1,910.7
Net operating assets, 2010 5,513.9
Core residual operating income, 2010 1,335.8
No-Growth Forecast of ReOI, 2011 1,335.8

No-Growth Forecast of operating income, 2011 1,835.3
Value of common equity

vE = CSE2010 + ReOI2010/kF 24,630.1
# of shares 484.4
Value per share 50.85
Value of operations
vNOA = vE + NFO 20,259.6
vNOA = NOA + ReOI/kF 20,259.6
vNOA = OI2011/kF 20,259.6
Growth Valution: Forecasting from accounting rates of return Page 487
Forecast of earnings component: Forecast earnings and its components by forecasting that the relevant balance
sheet component will earn at the current profitability
Operating OI1 = RNOA0*NOA0

Financing NFE1 = NBC0*NFO0
Earnings Earn1 = ROCE0*CSE0
Growth Valuations of Nike Inc.
Cost of capital for operations 9.06%

RNOA, 2010 (on average NOA) 30.60%
Growth rate for net operating assets (2006-2010) 4.6%
Growth forecast of operating income, 2011 1,687.0

Growth forecast of ReOI, 2011 1,187.5
Value of common equity

vE = CSE+ ReOI1/(kF-g) 36,516.6
Value per share 75.39
Value of operations
vNOA = vE + NFO 32,146.0
vNOA = NOA + ReOI1/(kF-g) 32,146.0
vNOA = NOA*(RNOA-g)/(kF-g) 32,146.0
Stephen Penman 2012
4.3. Full-information forecasting: Nike Inc.
Forecasts of key income statement ratios Page 441
2010A 2011E 2012E 2013E 2014E 2015E 2015E and after

Gross margin 46.3% 45.0% 45.0% 45.0% 45.0% 45.0% 45.0%
SG&A expense ratio 33.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Tax rate 36.3% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Sales growth -0.8% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Forecasts of turnover

Accounts receivable turnover 6.87 6.8 6.8 6.8 6.8 6.8 6.8
Inventory turnover 8.65 8.6 8.6 8.6 8.6 8.6 8.6
PPE turnover 9.78 9.7 9.7 9.7 9.7 9.7 9.7
Other NOA/Sales -5.8% -6% -6% -6% -6% -6% -6%
Pro forma financial statements

Income statement
Sales 19,014.0 19,774.6 20,565.5 21,388.2 22,243.7 23,133.4
Cost of sales 10,213.6 10,876.0 11,311.0 11,763.5 12,234.0 12,723.4
Gross margin 8,800.4 8,898.6 9,254.5 9,624.7 10,009.7 10,410.0
Total operating expenses 6,277.2 5,932.4 6,169.7 6,416.4 6,673.1 6,940.0
Core operating income before tax 2,523.2 2,966.2 3,084.8 3,208.2 3,336.6 3,470.0
Taxes 612.5 1,038.2 1,079.7 1,122.9 1,167.8 1,214.5
Core operating income after tax 1,910.7 1,928.0 2,005.1 2,085.3 2,168.8 2,255.5
Other income (expense) (96.4)
Operating income 1,814.4 1,928.0 2,005.1 2,085.3 2,168.8 2,255.5
Balance sheet
Account receivable 2,649.8 2,908.0 3,024.3 3,145.3 3,271.1 3,402.0
Inventory 2,040.8 2,299.4 2,391.3 2,487.0 2,586.5 2,689.9
Property, plant and equipment 1,931.9 2,038.6 2,120.2 2,205.0 2,293.2 2,384.9
Other NOA (1,108.6) (1,186.5) (1,233.9) (1,283.3) (1,334.6) (1,388.0)
Net operating assets (NOA) 5,513.9 6,059.5 6,301.9 6,554.0 6,816.1 7,088.8
Operating income 1,814.4 1,928.0 2,005.1 2,085.3 2,168.8 2,255.5

Change in NOA (832.3) 545.7 242.4 252.1 262.2 272.6
Free cash flow 2,646.7 1,382.4 1,762.8 1,833.3 1,906.6 1,982.9
RNOA 30.6% 33.3% 32.4% 32.4% 32.4% 32.4% 32.4%

ReOI 1,277.2 1,337.6 1,416.9 1,473.6 1,532.5 1,593.8 1,657.6
Growth in ReOI 4.7% 5.9% 4.0% 4.0% 4.0% 4.0%
Cost of operations 9.06%

Total PV of ReOI to 2010 5,670.2
Continuing value 32,764.6
PV of CV 21,237.2
NOA as of 2010 5,513.9
Value of operations 32,421.3
NFA (NFO) 4,370.5
Value of common equity 36,791.8
Number of shares outstanding 484.4
Value per share $ 75.95
Stephen Penman 2012
4.4. Reverse engineering: Implied Expected Return and Implied Growth Rate
Reverse engineering to get implied expected return (Page 665)
Stephen Penman 2012
Step 5: Bells and Whistles
Steps 1-4 set up a basic valuation tool. You can add additional features:
Sensitivity analysis (Chapters 15)

Business Strategy Analysis (Chapter 16)
Economics Value Analysis (Chapter 17) (Please see web page for this chapter with additional tools)
Quality of earnings analysis (Chapters 18)
Risk analysis (Chapters 19 and 20)

Building My Analysis

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Financial Statement Analysis & Security Valuation (Fifth Edition)

Stephen Penman (2012)

Use the tool for:

Reformulating financial statements (as in Chapters 8-11)

With this tool you will be able to

It will help you grasp the concepts

ells and whistles. You can

be exactly same as those on the

The roadmap: steps for building the product

1. Download financial statements

2. Reformulate financial statements

3. Financial statement analysis

4. Forecasting and valuation

5. Bells and whistles

The sections in this primer cover these steps in order.

Step 1: Download Financial Statements

1. EDGARscan developed by PricewaterhouseCoopers at http://edgarscan.pwcglobal.com;

These sites require subscriptions, however.

Separate operating and financing items in the statements

Allocate taxes in the income statement to operating and financing activities

Summary of reformulation steps

1. Statement of Shareholders' Equity

2) Calculate net transactions with shareholders

3) Calculate comprehensive income

4. Statement of Cash Flows

NIKE INC. STATEMENT OF SHAREHOLDERS' EQUITY

Balance at May 31, 2000 3,147.7

Balance at May 31, 2001 3,504.4

Balance at May 31, 2002 3,844.1

NIKE INC. BALANCE SHEETS

Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

2010/05/31 2009/05/31 2008/05/31 2007/05/31 2006/05/31 2005/05/31 2004/05/31

Net financial assets (obligations) (NFA/NFO):

Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

Financial income (NFE)

NIKE INC. STATEMENT OF CASH FLOWS

Proceeds from divesture 246.0

Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

Supplemental disclosure of cash flow information:

Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

Year ended May 31, 2010

Operating income, 2010 1,814.4

NOA, 2009 6,346.2 (832.3)

Free cash flow 2,646.7

C - I = NFE + Change in NFA + d

NFE, 2010 4.0

Free cash flow 2,646.7

Financial Statement Analysis and Valuation: Roadmap Stephen H. Penman 2001

Step 3: Financial Statement Analysis

3.1 Analysis of Profitability and Growth

NIKE, year ended May 31, 2010

Summary measure ROCE RNOA

First level breakdown RNOA+[FLEV*(RNOA-NBC)]

Second level breakdown RNOA = PM*ATO

2006 2007 2008 2007 2006 2005 2004 2003 2002

Analysis of change in RNOA

Level 1: Distinguish core and unusual components of RNOA

Change in core sales Change due to Change due to Change due to

2.56% 1.07% 0.87% 0 0.62%

A systematic analysis of the change in investment (CSE)

Change in CSE = Change in NOA + Change in NFA

NOA = Sales / ATO

Change due to Change due to

Step 3: Financial Statement Analysis