Question

Section E: Financial Statement Analysis. Ratios Meu Listed below are various ratios of NIKE. Inc. for the cure int Analysis--Ratios Method the current year and the prior year. Current Prior 9.8 38.6 0.7 0.7 2.5 2.8 1.5 Current Ratio. 1.6 Quick Ratio . 9.5 Accounts Receivable Turnover 37.2 Number of days' sales in receivables. 4.0 3.8 Inventory Turnover . 91.4 96.2 . Number of days' sales in inventory Ratio of Liabilities to Stockholders' Equity. 1.5 Asset Turnover 1.5 17.6% 16.4% Return on Total Assets Return on Common Stockholders' Equity 26.5% 30.1% . Earnings per Share . $2.21 $1.85 Market price per Share $54.90 $52.81 Price-earnings Ratio 24.8 28.5 What conclusions can be drawn from these ratios as to NIKE's liquidity, solvency, and profitability?

Answer 1

Liquidity

Current ratio has increased in value compared to the previous year. This could mean that the increase in current assets are more than current liabilities of Nike. Quick ratio has also increased in value when compared to previous year. Quick ratio only includes cash and short time securities as current assets (Inventory and prepaid expenses are not included). Nike's current ratio and quick ratio shows that, it has ability to pay off its current liabilities with just its cash and short term securities, further this ability has increased in comparison to previous year. The following are efficiency ratios, however they effect the liquidity of the company. The Accounts receivable Turnover has increased when compared to last year. This is a positive sign, this indicates the ability of Nike to efficiently issue and later on collect credit to its customers. The number of days sales in receivable ratio is the number of days it took on average for Nike to collect its accounts receivables. This has improved when compared to previous year, however most business has 30 days credit period, in that case Nike should improve in this. Inventory turnover shows how efficiently Nike manages its inventory. It measure how many times average inventory is converted into sales. Nike's inventory turnover has decreased when compared to previous year, this could be because of higher stocking of goods, or lower sales. Number of days sales in inventory tells us how many days Nike took to sell inventories, this has increased when compared to previous year. This is a negative sign, on linking Nike's inventory turnover and number of days sales in inventory, it can be concluded that the efficiency of sales department needs to be improved. But strictly on a liquidity basis, Nike is very healthy.

Solvency

There has been no change in Ratio of liabilities to stock holders equity. This ratio compares the companies total liabilities to stock holders equity. This concludes that shareholders equity is sufficient to cover all its liabilities, further there has not been extra debt financing during this year compared to previous year. So its safe to conclude that Nike is healthy on the grounds of Solvency

Profitability.

Asset turnover ratio measures how efficiently the business uses assets to generate sales. There has not been any increase in this ratio, this resembles our earlier discussion on inventory turnover and number of days in sales, where we concluded that the sales department needs to improve. Asset turnover ratio measures how efficiently the business uses assets to generate profit. This has improved from previous year. This is a positive sign, even though the sales department is under performing, other departments are performing well enough to increase net income with almost the same sales. Earnings per share, Market price of share and return on common shareholders equity has improved when compared to previous year. This is a very positive sign for stake holders. This shows that the company is very profitable and rewarding to investors. Price-earnings ratio compares the price of the shares with earnings per share. PE ratio of Nike has decreased, but this cannot be construed as a negative sign of its profitability. If we look close we can identify that, the reason why PE ratio decreased is that market price of Nike did not increase as much as EPS increased when compared to previous year. This could be due to some external reasons, due to why investors demand on company shares has not increased in same ratio of EPS increase. But from an internal profitability perspective of Nike, it is performing well.