Liquidity ratios are essential financial class metrics utilized to come up with the ability of a debtor to pay their current debt duties without having to raise external capital. It is utilized to evaluate the ability of a firm to pay debt duties and its safety margins by calculating metrics that include quick, operating cash flow, and current ratio. The current ratio evaluates the capacity of Nike to payback current debts within a year (Carraher & Van Auken, 2013). Compared to the previous year, Nike's current liabilities have decreased. Meaning that the current assets of Nike such as inventories and accounts receivables have reduced and therefore, the firm’s capacity to payback its current liability is reduced.
The current ratio is a ratio of existing assets and current debts. It indicates that Nike’s current ratio has reduced even though it is above one. This means that it still can pay off its debts. The quick ration determines the capacity of the firm to payback its short term obligations using its highest liquid assets and thus does not include inventory from the company's current assets. Nike has a reduced current ratio in comparison to the past year, therefore, reducing its capability to payback obligations that are short-term. DSO (Days Sales Outstanding) is the days taken to take payment after it has made a sale (Kraft, 2014). Nike has a low DSO, therefore, showing that the company has very little capital held up in receivables.
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Solvency ratio is a metric that is used to calculate a organization’s capacity to achieve its responsibilities of debt and mostly used by established business lenders. Nike has a stable solvency ratio meaning that it can closeout its long-term commitment of liability when they are due by using its income for operation. In other words, Nike is creditworthy and can attract lenders (Carraher & Van Auken, 2013). There are many facets of solvency which include debt to capital, debt to equity, debt to asset, and financial leverage ratio. The financial leverage ratio for Nike has appreciated compared to the previous year of 2018 and 2019. Fixed coverage and fixed charge coverage ratio have also slightly increased from 2018 to 2019, showing that Nike can cover its long-term liabilities.
Profitability ratios are financial class metrics utilized to evaluate a firm’s capacity to give rise to earnings in proportion to its income, equities of shareholders over time, assets of balance sheets and operating costs using information from a particular point. The gross profit margins of Nike improved from 2018 to 2019. The operating profit margin of Nike deteriorated from 2018 to 2019, and the net profit margin of the company grew between 2018 and 2019. However, Nike has a high profitability ratio compared to its competitor, indicating that the firm is doing well. From the data, Nike seems to experience seasonality, meaning that the company uses its return on assets very well by utilizing its assets. It uses return on investment to compare its past performance (Wahlen, Baginski, & Bradshaw, 2014). However, in some cases, it has reduced, but it is still at a level that is stable in comparison to other companies in the same industry.
Adidas's current ratio indicates that the firm is efficient enough in its functioning cycle or its capacity to transform its products into money. This means that Adidas has no trouble in receiving payment on their receivables. They also do not have inventory turnover that is long and therefore, cannot run into liquidity issues because they can pay off their obligations. Compared with Nike, it is fairing on slightly lower than Nike but has a higher current ratio. Its ratio is above one and thus can pay off its obligations within a financial year. It is, therefore, in a position to be considered by a creditor because it has a high current ratio. This is because of its capacity to pay off its liabilities without fail within 12 months. Compared to other companies within the same industry, such as Nike, Adidas is showing signs of struggling to grow or maintain its sales, slowly collecting its receivables or paying its bills. This means that the company has a slower conversion of the cash cycle and inventory turnover.
The solvency ratio for Adidas is calculated through a division of after-tax net functioning earnings of the firm by the sum of debt obligations. This is the way to determine if the company will stay solvent. The solvency ratio determines the firm's cash flow through the summation of other none cash costs and depreciation. Adidas has a solvency ratio that is above 20% and therefore is financially sound (Kraft, 2014). Compared to Nike, it is slightly less but shows that the company can compete favorably with Nike. This comparison gives relative solvency, which determines the actual solvency ratio of the company. The company, therefore, can stay solvent when all the factors of solvency are compared to Nike. Compared to Nike, the financial leverage for Adidas decrease for the period 2018 and 2019. In contrast to Nike, Fixed coverage and fixed charge coverage ration depreciated for the year 2018 and 2019.
The profitability ration measures the attractiveness of a company for stocks. Compared to Nike, the profitability ratio for Adidas is significantly higher. This also indicates how the company will remain profitable. This suggests that Adidas is continually making a profit and may reflect on the financial stability of the firm. Adidas, therefore, can survive business recessions and slowdowns because of its financial strengths. The debt to revenue ration of the firm is lower and thus favors the company. The reason for this is that the firm can generate operating costs and income using information from a particular period (Wahlen, Baginski, & Bradshaw, 2014). The margin ratio indicates that goods and services for the firm are excellent by looking at the ratio between gross profit and net sales. The operating margin of Adidas also looks good, showing that the company manages administrative costs well, which is unrelated to the cost of production.
References
Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making by small firms. Journal of Small Business & Entrepreneurship , 26 (3), 323-336.
Kraft, P. (2014). Rating agency adjustments to GAAP financial statements and their effect on ratings and credit spreads. The Accounting Review , 90 (2), 641-674.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial statement analysis, and valuation . Nelson Education.
