1. Short-term Solvency

  1. Short-term Solvency

    1. Current Ratio

    1. Quick Ratio

  1. Long-Term Solvency

    1. Total Debt Ratio

    1. Long Term Debt Ratio

    1. Interest Coverage

=0

=0

  1. Asset Management Measures

    1. Inventory Turnover

=3.89

=4.098

    1. Receivables Turnover

=10.24

  1. Profitability Measures

    1. Profit Margin

    1. ROA

    1. ROE

=0.223

  1. Market Value Measures

    1. P/E Ratio

    1. Market-to-Book Ratio

Discussionon Ratio Analysis

  • Short Term Solvency: The current and quick ratios should be greater than one for minimum operations. For the two years, the current and quick ratios are less than one. This implies that Liabilities are too much higher than the assets, and hence control measures should be put into place.

  • Long-Term Solvency: The debt ratio, long term debt ratio and interest coverage are supposed at maximum be one. However, a value of less than one is an indication that the company is doing well, and the liabilities are reduced. In the case of Nike, these ratios are less than 1, and this indicates that the company will have exemplary performance in the long term.

  • Asset Management Measures: The inventory turnover and receivables turnover reflect the capabilities of the company in managing its assets. A higher ratio is an indication of healthy assets. In Nike, the ratios are above one, hence a reflection of proper asset management approach.

  • Profitability Measures: The profit margin, ROE and ROA are a reflection of the ability of the company to remain profitable and feasibility of investors investing in that company. A value closer to one is a reflection of healthy investment. From the analysis, these ratios are considerably smaller than one, hence need for proper control measures to facilitate more investment.

  • Market Value Measures: The P/E ratio and Market to book ratio are reflection of the market value, especially in terms of the stock’s value. The two ratios can be used as market judgment platforms for investments.

DuPont Analysis

The Du Pont Analysis breaks downROE into three distinct parts. This is critical in evaluating theinferior and superior return through comparing with the companiesthat are in a similar industry. For instance, Nike can be comparedwith Adidas and Reebok. Ideally, ROE is the ratio of net income toaverage shareholders’ equity. The trends in ROE can be analyzed forbenchmarking. However, this expression of ROE is an incompletereflection of the financial situation of a company. This is becauseissuing debts can result into interest expense that lowers net incomewhile selling more shares can easily lower the earnings per share.

Hence, ROE can be deconstructedand presented as a product of net profit margin, equity multiplierand asset turnover. This is the only way that the effectiveness inprofit generation by the management, efficiency in asset managementand determination of optimal leverage can be captured.

Conclusion

From the analysis, it can beconcluded that the ratios are considerably high than for othercompanies. As a result, Nike can be thought to be riskier as theliabilities are higher than the equity. Also, the ratios such asreturn on equity are over 20 percent, and this implies that thecompany is turning the profits relative to the stockholders equity inan attractive way hence investors can invest.

Reference

Bull, R. (2008). Financial Ratios: How to Use Financial Ratios to Maximise Value and Success for Your Business. Oxford: CIMA.

Appendix

INCOME STATEMENT

Period Ending:

5/31/2014

5/31/2013

Total Revenue

$27,799,000

$25,313,000

Cost of Revenue

$15,353,000

$14,279,000

Gross Profit

$12,446,000

$11,034,000

Operating Expenses

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Research and Development

$0

$0

Sales, General and Admin.

$8,766,000

$7,796,000

Non-Recurring Items

$0

$0

Other Operating Items

$0

$0

Operating Income

$3,680,000

$3,238,000

Add`l income/expense items

($103,000)

$15,000

Earnings Before Interest and Tax

$3,544,000

$3,256,000

Interest Expense

$0

$0

Earnings Before Tax

$3,544,000

$3,256,000

Income Tax

$851,000

$805,000

Minority Interest

$0

$0

Equity Earnings/Loss Unconsolidated Subsidiary

$0

$0

Net Income-Cont. Operations

$2,693,000

$2,451,000

Net Income

$2,693,000

$2,472,000

Net Income Applicable to Common Shareholders

$2,693,000

$2,472,000

BALANCE SHEET

Period Ending:

5/31/2014

5/31/2013

Current Assets

Cash and Cash Equivalents

$2,220,000

$3,337,000

Short-Term Investments

$2,922,000

$2,628,000

Net Receivables

$3,789,000

$3,425,000

Inventory

$3,947,000

$3,484,000

Other Current Assets

$818,000

$756,000

Total Current Assets

$13,696,000

$13,630,000

Long-Term Assets

Long-Term Investments

$0

$0

Fixed Assets

$2,834,000

$2,452,000

Goodwill

$131,000

$131,000

Intangible Assets

$282,000

$289,000

Other Assets

$0

$0

Deferred Asset Charges

$1,651,000

$1,043,000

Total Assets

$18,594,000

$17,545,000

Current Liabilities

Accounts Payable

$4,853,000

$3,789,000

Short-Term Debt / Current Portion of Long-Term Debt

$174,000

$155,000

Other Current Liabilities

$0

$18,000

Total Current Liabilities

$5,027,000

$3,962,000

Long-Term Debt

$1,199,000

$1,210,000

Other Liabilities

$0

$0

Deferred Liability Charges

$1,544,000

$1,292,000

Misc. Stocks

$0

$0

Minority Interest

$0

$0

Total Liabilities

$7,770,000

$6,464,000

Stock Holders Equity

Preferred Stocks

0

0

Common Stocks

$3,000

$3,000

Capital Surplus

$5,865,000

$5,184,000

Retained Earnings

$4,871,000

$5,620,000

Treasury Stock

$0

$0

Other Equity

$85,000

$274,000

Total Equity

$10,824,000

$11,081,000

Total Liabilities &amp Equity

$18,594,000

$17,545,000

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