Interpreting Financial Statements

1 Interpreting Financial Statements Adidas and Nike are sport-related companies that have been very close competitors over time. The market capitalization for Adidas at the end of 2019 was approximately 18,000 Euros.

1000$ investment in Nike would yield about 87 (units of what?). If adjusted for the stock splits, you would have 5,568 shares at the moment without dividend reinvestment. This shows that the two companies have been very conspicuous in the market. The paper considers the two companies' positions in terms of liquidity, activity, financial leverage, managerial efficiency, and profitability, among other ratios.

Managerial efficiency Adidas’ current asset ratio has reduced by 0.07 times, from 1.40 times in 2015 to 1.31 times in 2016. This shows that Adidas has become less soluble during the year. Similarly, Adidas’ quick asset ratio has decreased from 0.82 times in 2015 to 0.76 times in 2016, a drop of 0.06 times. The ratios stabilized even more in 2018 and 2019.

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2 The manner in which the companies use assets also points to some level of managerial efficiency. The BEP can help determine how effectively a firm is likely to use its assets to generate income. The BEP for Nike was an average of 19.36, while Adidas was at 8.38%. Nike is more efficient with regard to the ratio. The industry average was at 14.08% (Nasdaq, 2018).

Liquidity The two liquidity ratios that will be used in this case are the current ratios and the quick ratios. The current ratios give an idea of the company's ability to pay back its liabilities with its assets.

Current Ratio = Current Assets / Current Liabilities In 2018, Adidas' current assets were valued at 9.77 Billion (Amigobulls Inc, 2019). The current liabilities were valued at 7.11 Billion. As such, the current ratio was; (9.77/7.11) = 1.28 In the same year, the current assets for Nike were valued at $16 billion, while the current liabilities were $5.4 dollars.

(16/5.4) = 2.96.

This clearly shows that Adidas has a lower current ratio as compared to Nike. It implies that Adidas' liquidity position to pay its liabilities is weaker than Nike's. As such, Adidas has to work on raising its current ratio by increasing the number of current assets while at the same time reducing the amount of current liabilities.

The quick ratio measures the ability of a firm to pay off short-term obligations without depending on the sale of inventories. The quick ratios of the two companies as per the 2018 financial statements are as follows; Quick ratio = (current assets – inventories) / current liabilities

3 For Addidas, (9.77-4.17)/7.11) = 0.79 For Nike, (16-5)/5.4) = 2.04 The quick ratio for Adidas is lower again. This means that Nike has more liquid assets to pay its current liabilities. Its liquidity position is better than the liquidity position of Nike (Nasdaq, 2018).

Financial Leverage / Financial Health This will measure the overall debt load of a company and compare it with equity or assets. The two ratios that will be used in this case are the debt ratios and the equity ratios.

Debt ratios Debt ratio = Total liabilities/Total assets Adidas, (9.14/16.41) = 0.56 Nike, (10.9/23.3) = 0.47 As far as the debt ratios are concerned, the two companies are in a stable condition. However, Nike has a more favorable debt ratio with a higher potential for longevity.

Equity ratios This measures the amount of assets that are financed by the owners’ investments by comparing the total equity in the company to the total assets (Fried, DeSchriver & Mondello, 2013).

Equity ratio = Total equity/Total assets Adidas = (7.27/16.41) = 0.44 Nike = (12.4/23.3) = 0.53 The equity ratio is more favorable for Nike. It shows that the company is more worthy of investing in and that the potential creditors will have more confidence as the company is less risky and more sustainable to lend future loans compared to Adidas.

4 Profitability The ratios to be considered in this case are the operating margins and the profit margins.

Profit margin = net sales/net income.

The results show that Adidas exhibits a higher operating cost than Nike (refer to the spreadsheet) Operating margin=Operating income/net sales The results show that Nike is relatively stable (refer to the spreadsheet).

Growth Ratios Here, there is a need to consider the stock price and the current P/E ratio. For the last 10 years, Nike has been able to record a stock price increase of about 350%. This shows that there has been an annual growth of about 35%. In the year 2020, the stock of the company reached an all-time high of about $104.58 before getting to 20.4% in February. The P/E ratio for Nike is 30.80. This indicates that the stock price is trading at about 30 times earnings, which is very high.

On the other hand, the stock price of Adidas over the 10 years was 415.5%, which was a growth rate of about 42%. In 2020, it reached a high of $316.05 in 2020. The current P/E ratio was about 21.5. The stock of the company is therefore doing equally as well.

5 References Amigobulls Inc. (2019). Adidas Balance Sheet - Annual (OTCMKTS: ADDYY). Retrieved from https://amigobulls.com/stocks/ADDYY/balance-sheet/annual Fried, G., DeSchriver, T. D., & Mondello, M. (2013). Sport finance. Human Kinetics.

Nasdaq. (2018). Annual Income Statement. Retrieved from https://www.nasdaq.com/symbol/nke/financials?query=balance-sheet