Question

Section E: Financial Statement Analysis--Ratios Method Listed below are various ratios of NIKE, Inc. for the current year current year and the prior year. Current 2.8 Current Ratio . . . Quick Ratio . 1.6 1.5 9.8 Accounts Receivable Turnover 9.5 Number of days' sales in receivables. . 37.2 38.6 Inventory Turnover . . . . 3.8 4.0 Number of days' sales in inventory. 96.2 91.4 Ratio of Liabilities to Stockholders' Equity. 0.7 0.7 Asset Turnover . . . . 1.5 1.5 Return on Total Assets 17.6% 16.4% Return on Common Stockholders' Equity . 30.1% 26.5% . . . $2.21 $1.85 Earnings per Share . Market price per Share . . . $54.90 $52.81 Price-earnings Ratio . . . . . 24.8 28.5 Phat conclusions can be drawn from these ratios as to NIKE's liquidity, solvency, and ofitability?

Answer 1

Liquidity ratios: Liquidity ratios depict the firm's strength to pay the company's short-term obligations i.e. current liabilities and to meet unexpected needs for cash. Liquidity ratios also tell the analyst how many assets are quickly converted into cash to pay off the company's obligation when they become due. Following are the liquidity ratio as given below: 1. Working capital ratio 2. Current ratio 3. Cash current debt coverage ratio 4. Receivable tumover ratio 5. Average collection period ratio 6. Inventory Tumover ratio 7. Days in inventory ratio Nike Inc.'s current ratio. quick ratio, accounts receivable tumover ratio perform better as compare to prior years and sales receivable and inventory tumover slightly slips to lower level but their impact was negligible to the overall profitability of the company. Hence, profitability better in condition.

Profitability ratios: The profitability ratio measures the entity's ability to generate operating earnings for a specific period of time. This ratio deals with the statement of financial position and income statement items. Following are the ratios as given below: Gross profit margin ► Profit margin > Asset Turnover > Retum on Assets > Retum on common shareholder's equity ► Earnings per share ► Price-Earnings (P-E) Ratio → Payout Ratio > Dividend Yield Nike Inc.'s profitability looks healthy in condition as retum on common stockholders' equity, EPS and MPS shows a significant increase from the prior year.

Solvency ratio: It is an extended version of the liquidity ratio in which it measures the company's ability to pay its Total liabilities, as compares to liquidity ratio which only measures the ability to pay its short-term obligations of the entity. Solvency ratio included the following ratio as given below: → Debt to Total Assets > Times Interest Eamed Cash Total Debt Coverage Free cash flow Solvency of Nike Inc. seems intact as the ratio of liabilities to stockholders' equity and asset turnover remains the constant and slight increase in return on total assets.