Introduction
Financial analysis of a company is an important exercise in ensuring that a stakeholder has sufficient information about options before spending their money thereon. Financial analysis gives the stakeholder a view of their potential investment through a series of indicators that will determine if the company they wish to invest in is worth their money. It is absolutely imperative to provide adequate financial analysis before investing in the company.
Sports manufacturing and distribution has been an area of interest especially with worldwide events such as the World Cup, the Olympics and various other sporting events that attract a lot of revenue. As a result, this paper decidedly investigated two major industry players in a bid to determine the better investment. Adidas and Nike were considered as the main market players, leading to an analysis of the two companies. This paper determines which of the two companies is a better investment.
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Importance of the Study
In a time when stability and industry predictability are aspects that investors are looking for, it is important to know that one can invest in an area where the relative safety of their money can be assured. Investment propositions are therefore better provided by companies that have been in the market quite long and can provide steady investment opportunity. In fact, the older the company, the more appealing it is to the investor. The rich history assures the investor that the company enjoys a loyal customer base, steady income streams and established market presence, thereby standing the test of time (Altman, 1968).
The sports business is one such industry, where establishment since the early twentieth century has earned it some of the most stable franchises and market players. Athletic apparel and media companies provide some of the best investment opportunities with deviation from traditional investment. Nonetheless, this method carries its own significant challenges. Nonetheless, some advantages that this industry has is the extreme customer loyalty that is present within the industry, thereby assuring it of consistent income streams. A family can easily spend $1000 attending a sports event, meaning that the client base is quite enthusiastic about sports spending.
Furthermore, there are increasing distribution channels such as mobile phones, radio and pay-per-view shows, meaning that there are several income streams associated with the use of sports for the purpose of income generation. With the increase in distribution channels, there is access to a bigger market for the sale of sports goods all over the world. Moreover, the industry enjoys peculiar characteristic of the lack of competition. The sporting industry is riddled with barriers to entry, meaning that there are very few market players within any given sector, whether media or sporting apparel. As a result, it provides the perfect analysis for a side-by-side analysis of major market players to determine the better horse to ride. With these factors in mind, this paper considers two market players in sports apparel manufacture and distribution: Nike and Adidas.
Objective of the Study
This study aims to determine which company between Nike and Adidas is a better investment opportunity citing financial ratio information as the basis for the conclusion.
Financial Ratios
Considering data from the Financial Morning Star, the financial ratios for Adidas are considered in the table below. Different ratios which measure different company outcomes are recorded for a five year period to determine trends in the various indicators.
Table 1 : Adidas Financial Information (Financial Morning Star, 2016).
Below, the financial ratio data for Nike is also considered:
Table 2 : Nike Financial Information (Financial Morning Star, 2016).
Explanation and Discussion
Financial ratios are a way to look into the finances of a company in a brief and concise manner, yet with the ability to determine if the company is performing well or not. Moreover, trends in financial ratios will tell the potential investor concerning the trends that the company is making with regards to the ratios, and effectively its financial performance. As a result this section briefly discusses the financial indicators as have been presented in the above graphical depictions.
The return on assets (ROA) is an indicator of company efficiency as it gives the investor an idea of how the company is taking advantage of its assets to bring in income. Therefore, this shows that higher earnings per asset is important to provide financial stability of a company. In this case, ROA for Nike is consistently higher than that of Adidas, with Nike bringing in up to $15 return on assets as compared to Adidas’ $7. Return on equity (ROE) is equally an efficiency measure, determining the amount of returns that a company makes from stockholder’s investment into the company. This directly corresponds with the ability for the company to give returns to a potential investor. Considering the two companies, both have relatively high ROE. However, Nike shows a consistently rising value for stakeholder investment while Adidas shows a fluctuating investment for the stakeholder.
The current ratio determines the company’s liquidity. This ratio compares the assets against liabilities to determine the company’s ability to pay off debts. A higher current ratio shows a greater ability to pay debts should it come to that. A comparative analysis shows that Nike has better standing with regards to paying debts compared to Adidas. Quick ratio, on the other hand, measures a company’s ability to meet its short-term financial liabilities. Nike’s quick ratio is consistently over 1.5 showing that for every $1 value in short-term liabilities, the company can offer $1.5 to pay it off. However, Adidas quick ratio value is constantly under 0.8, showing that short-term liabilities could overwhelm the company.
The inventory turnover shows the number of times inventory is sold per year. This reflect directly on the revenue of the company. Higher inventory turnover means that the company is making more sales. Adidas inventory ranges from 2.8-3.1 in value, showing that there is a considerable amount of goods sold for Adidas each year. Comparatively, Nike inventory turnover ranged from 4-4.7 showing significantly higher income streams for Nike. Receivables turnover considers the amount of goods sold on credit against the total sales the company is making. The value then considers how long credit payments take to be made to the company. With regards to this, there is similarity for both companies as both have a value of between 7-8 days.
Financial leverage is also another consideration that was made when comparing the two sports manufacturing companies. An overview of how output can affect the company’s income is determined through leverage ratios. In this case, wholesome ratio was calculated. It was found that Adidas constantly had a higher ratio range (2.11-2.35) as compared to Nike (1.49-1.72). This shows that Adidas has higher risk than Nike if the output of the company changed. Lastly, the debt/equity ratio was considered for both companies. Here, liabilities of a company are divided by the stockholder’s equity to determine how much debt the company is using to finance itself. Too much debt is dangerous for a company. Therefore, a lower ratio is healthy for the company. In this case, Adidas ranges from 0.11-0.28 in the five year period given while Nike ranges from 0.02-0.11. This shows that Nike raises significantly lower income from debt as compared to Adidas.
Conclusion
Among other reasons as displayed above, Nike shows superiority in terms of financial management on almost every possible financial ground. Moreover, Nike now has a standing as an international sports market dominator for the last two decades after overtaking market players Adidas and reebok. While one could think that it is possibly because of the endorsements, the financial information show that it is equally about the management the company has taken up as well as a series of strategic product manufacture and distribution strategies which are exceptional. Therefore, this paper would conclude that in the sports manufacturing industry, Nike is the best company to invest in.
References
Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The journal of finance, 23(4) , 589-609.
Financial Morning Star. (2016). adidas AG ADR . Retrieved from Financial Morning Star: http://financials.morningstar.com/ratios/r.html?t=ADDYY .
Financial Morning Star. (2016). Nike Inc B . Retrieved from Financial Morning Star: http://financials.morningstar.com/ratios/r.html?t=NKE .
