Nike’s Financial Analysis

Nike’s Financial Analysis

Profitability Ratios (Based on Nike’s May 2021 filings)

1. Return on total assets (ROA)

ROA = 100 × Net income ÷ Total assets

Net Income= $ 5,727,000,000

Total Assets= $37,740,000,000

= 100 × 5,727 ÷ 37,740

= 15.17%

Return on assets is calculated by dividing net income by total assets. Nike’s ROA continues to rise, having deteriorated the previous year. The ratio shows how successfully a company can convert its asset purchases expenditures into profits. A higher ratio is preferred since that indicates that the management manages assets effectively to produce good results. Besides, a positive ROA is indicative of an upward profit trend (Dybek, 2018).

2. Return on stockholders’ equity (or return on net worth)

ROE = 100 × Net income ÷ Shareholders’ equity

Shareholder’s Equity= $12,767,000

= 100 × 5,727 ÷ 12,767

= 44.86%

The return on equity is significant, and it represents an improvement from the previous financial year (2019/2020). ROE gauges the company’s profitability and its efficiency in creating profits.

3. Operating Profit Margin (Return on Sales)

=Operating profit margin = 100 × Operating income ÷ Revenues

Operating Income= $6,937,000,000

Revenues= 44,538,000,000

= 100 × 6,937 ÷ 44,538

= 15.58%

The operating profit margin is calculated by dividing operating income by revenues. It shows the profit the company produces before taxes and interest charge deductions. To analyze how the business is doing based on the operating profit margin, the ratio is benchmarked against industry peers to measure the success level. Further, the ratio reveals the top performer in the industry and why the company is lagging or leading (Dybek, 2018).

4. Net Profit Margin

Net profit margin = 100 × Net income ÷ Revenues

Net Income= $5,727,000,000

Revenues= $44,538,000,000

= 100 × 5,727 ÷ 44,538 = 12.86%

Net profit margin is a profitability indicator obtained by dividing net income by revenue. A 12.86% profit margin means that Nike earns $0.12 in profits for every dollar it spends. The net profit margin is perhaps one of the most useful indicators of a company’s profitability. It shows the income after all costs and cash flows are fully catered for.

The Impact of Strategic Alliances on Profitability

Strategic alliances in most sectors include collaboration in various business areas, including marketing, branding, supply, and knowledge sharing. By eliminating competition and replacing it with collaboration, firms exploit their capabilities for a shared goal (Butigan & Benić, 2017). Strategic alliances enable firms to control industrial risks and threats, benefiting from resulting earnings, tangible or intangible. Despite the advantages of forming a strategic alliance, there are also possible negative effects that may result from the same.

If one of the members in a strategic alliance files for bankruptcy, the ripple effects will hurt other business partners. One of the immediate aftermaths of one of the members filing bankruptcy is a negative stock price reaction from the counterparty. Besides, non-bankrupt members continue to experience declining profitability and investment in the subsequent years following a partner’s bankruptcy filing (Boone & Ivanov, 2012). Once a partner declares bankruptcy, spillover effects on contracting parties are inevitable.

Strategic alliances also affect individual firms’ performance and competitiveness. Strategic alliances could be negative if the decision to form a strategic alliance is based on opportunistic goals; hence, there is no complementarity. Besides, the fear that some partners in the alliance are opportunistic prevents the complete joining of resources, negatively affecting every firm’s profitability.

Managers can analyze the impact of strategic alliances from the prism of transaction costs economics. The realization that a firm may achieve its targets by leveraging on the partnership drives opportunistic behavior, resulting in increased contracts and monitoring costs. Finally, forming alliances disrupts decision-making, which leads to increased coordination costs, a recipe for decreasing profitability.

Profitability ratios are the most suited to measure the aftermaths of a strategic alliance. Crucial financial metrics like net profit, revenue, return on investment, and cash flows inform about the financial fitness of a strategic alliance. A strategic alliance should focus on getting discounts, reducing overlapping costs, and improving revenues. Financial metrics indicate the performance of the strategic alliance relative to individual firms.

Capital

Trading stock shares presents the best capital mobilization opportunity for Nike. The company is a market leader in the stocks exchange market, with its shares currently selling at $56.63. The relatively high stock price and high investor confidence, among other metrics, aid the company in raising capital from the stock market.

References

Boone, A. L., & Ivanov, V. I. (2012). Bankruptcy spillover effects on strategic alliance partners. Journal of Financial Economics, 103(3), 551–569. https://doi.org/10.1016/j.jfineco.2011.10.003

Butigan, N., & Benić, Đ. (2017). The Impact of Membership in Strategic Alliances on the Profitability of Firms in the Retail Sector. Croatian Economic Survey, 19(2), 47–82. https://doi.org/10.15179/ces.19.2.2

Dybek, M. (2018). Nike Inc. (NKE) | Profitability Analysis. Stock Analysis on Net; Stock Analysis on Net. https://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Profitability

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Refer to Tables A-1 through A-5 in Appendix II of the text for the operational definitions of and formulas for numerous common financial ratios, including profitability, liquidity, leverage, activity, and shareholders’ return. Using these formulas, complete at least one ratio from each of the five categories, though you may apply as many of the ratios for which you can find the required information in the firm’s financial reports. On your calculations page, specify for which formulas you are solving.

Nike’s Financial Analysis

In an assessment of approximately 750 words, address the following:

Determine which of the ratios provides the most key insights into the firm’s current level of performance. How can you assess whether the results of your calculations are positive or negative? Explain which of the ratios gives you a reason to be concerned with the organization’s current strategy and why.
The Organizational and Operational Plans assignment references the possible benefits and risks of forming a strategic alliance. What would be the risks of forming a strategic alliance in terms of the firm’s profitability ratios? Which of those five ratios is most likely to reveal immediate information for analysis of the alliance’s effectiveness?
Considering today’s financial climate, how likely is it that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of the liquidity ratios will be impacted by the influx of capital if borrowed?