Revenue Forecasting: How to Make an Accurate Sales Forecast

The financial information of a company provides a lot of pointers regarding the performance of the company in comparison with other industry players. Financial reporting is thus foundational to the management’s ability to understand the position of the company, determine strengths and shortcomings and address possible strategies to improve on weak points. This paper analyzes the financial information of Nike Inc. to make conclusions about the company’s performance in current market situations.

One of the indicators that give the company’s position in the market is the financial ratios. Financial ratio information takes comparisons between different kinds of financial information to make inferences on the financial viability of the company as an investment-worthy destination. Liquidity ratios, for example, show the management and potential investors the company’s ability to handle its liability. Since liquidity is all about the company’s daily income and expenses, liquidity ratios will compare the company’s daily operations to determine ability to pay off debts. Solvency ratios, similar to liquidity ratios, also examine a company’s ability to pay off long-term debts. Solvency ratios are calculated to ensure that the company can meet its financial obligation in the future, especially in a situation where insolvency occurs.

Lastly, profitability ratios are used to measure the efficiency of the company in managing its investments. The return on assets ratio is an example of such a ratio which determines efficiency when investing in the purchase of assets for the company. Moreover, profitability looks at the company’s ability to make profits based on acquisitions either by equity or through assets. Profitability ratios thus show the company’s efficiency. Profits can be split into margins and returns. Margin ratios show the company’s ability to make dollar profits at various stages where they are measured. Measures showing return depict the firm’s ability to measure overall profit gain from an entire venture and its impact on the stockholder.

In the case of Nike Inc., data was obtained from the financial morning star regarding the financial ratios for the company on all three aspects. 2016 figures for the liquidity ratios are tabulated below:

According to the information above, one can make determinations about the financial position of Nike Inc. Considering liquidity ratios, current ratio stands at 2.8 meaning that the comparison of company assets to liabilities amounts to this value. This is a healthy ratio as the threshold is 1.0. The quick ratio determines a company’s ability to meet short-term debts. Again, the threshold is 1.0 and Nike enjoys a healthy ratio of 1.62. Financial leverage, on the other hand, considers assets relative to equity. With a ratio of 1.75, Nike is effectively on top of its game with regards to liquidity.

One can also consider the profitability ratios available through the return on assets. Nike is able to give a 17.49% profit per dollar of investment on assets, 30.12% return per dollar of equity and an aggregated profit margin of 11.61%. These are favorable numbers considering the size and operations of the company.

The debt-to-equity ratio is a measure of financial leverage which allows the management to know the amount of debt used to finance asset acquisition against the stockholder’s share in the purchase money. Therefore, a lower ratio is more favorable to the company as it indicates the company’s financial abilities in procuring its own assets. In this case, Nike has a ratio of 0.16, showing a very small contribution of the stockholder’s to Nike’s acquisitions. All in all, the financial ratios of Nike show that the company is quite solid and able to chart its course financially.

Calculations and Discussion 

Current ratio = total assets/total liabilities

= 21396/9138

= 2.341

Profit margin = Net income/Net sales

= 3760/14971

= 0.251

After tax ROE = net income after tax/stockholder equity (in percentage)

= 3760/12258

= 0.307 or (30.7%)

When comparing these figures to those on the financial statements, one realizes that the values vary, albeit they are nearly the same. The 2016 value for ROE, for example, is 30.12%, which can be attributed to the accuracy of financial statements as opposed to the values used above which are expressed in thousand dollars. In effect, the rounding off of values will attribute to the small deviations, revealing that calculations done here and on the balance sheet would agree.

In conclusion, then, financial ratio information is important in determining the company’s strategic financial position for better management. Additionally, ratio information which holds for manual calculations and financial reports show the importance of integrity in financial reporting for the purpose of third party viewing.

References

Financial Morning Star. (2017). Statement of Cash Flow . Retrieved from Financial Morning Star: http://financials.morningstar.com/cash-flow/cf.html?t=NKE&region=usa&culture=en-US;

Financial Morning Star. (2017). Income statement. Retrieved from Financial Morning Star: http://financials.morningstar.com/income-statement/is.html?t=NKE

Financial Morning Star. Balance Sheet. Retrieved from Financial Morning Star:http://financials.morningstar.com/balance-sheet/bs.html?t=NKE&region=usa&culture=en-US