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Table of Content
Strategic planning and budgeting (400
words)
Critical financial analyses of
financial activities of Nike
Profit Planning and Cost Controls 70
words
Critical Analyses of Effectiveness of
Financial Activities 50 Words
Use of Financial Techniques in Cash
Flow Decision Making
To Propose Capital Structure (300
Words)
Nike Inc. was found in 1964 as Blue ribbon Sports by
Bill Bowerman, he was a track field coach at the University of Oregon. Nike was
a sportswear American based company, headquarters based in Oregon. Their
first-ever outlet was made in 1966 and the first signature Nike shoe was
produced in 1972 and further changed its name into Nike in 1978. Now they are
operating in more than170 countries around the globe. From the early '80s, Nike
expanded its business by using aggressive acquisition and diversification
strategy which increased their product line as well as their market share.
Nike also opted for aggressive marketing campaigns by
world-famous sportsmen and celebrities such as Roger Federer, Tiger Woods, Mia
Hamm, etc. As Nike operated in Athletic footwear industry, this industry is
risky. Challenging and saturated. In this challenging external environment, Nike
manages to grab the largest share in the footwear industry and continues to be
number one in quality athletic footwear. Nike targets both athletes as well as
the general public by offering different products
They have a diverse product range; they have six
product categories:
·
Running
·
Nike Basketball
·
Jordan Brand
·
Football
·
Training
· Sportswear (Lifestyle products inspired by sports)
The strategic planning and budgeting of the Nike are
based on the financial departments making of budget and other taking other
decisions related to managing the workings of the organization by making better
planning in making more appropriate strategies in the organization’s working. The
following departments use to manage the workings in a way that they must be
able to highlight all the workings improvements in the Nike organization:
Operating department use to manage the workings
allowing the things to be more operative and smoother. Operating activities are
the activities which are directly related to net income, changes in working
capital and further adjustments in the net income of the organization. It is
the section where it provides information on sources and uses of cash in the
ongoing period on daily business activities. To operate in the best way Nike is
working according to the accurate methods and dealing in the way with which
they can surely get a successful outcome of the operations in the company.
Financing activities are the cash
activities which are related to noncurrent liabilities and owners' equity for
an example principle amount of long term debt, dividend payments, stock sales
and repurchase. These activities provide a clear view on where the cash was
exactly spent because there are certain payments which are not shown in other
financial statements of the organization, and for future, it helps in creating
excess cash if needed because by looking into profit loss account it makes
difficult to focus on making cash, rather looking and focusing into these
activities can help the organization. Also,
these three activities help in revealing the clear cash results by comparing it
with projected cash flow statement and budgets, the variance between projected
and actual cash inflow and outflow determines which actions are to be taken in
future. It also helps in identifying the optimum level of cash available, it
helps in reducing the risk of liquidity.
These are the cash activities related to the
non-current assets of the organization for example long term investments, plant
property equipment, the total amount of loans made to other entities. For
example, if Nike earns from land and pays for a long term investment in another
organization, it would be included in these activities. Investment methods of
Nike are smooth and efficient as they are going to get high profitability for
the organization.
Any company's financial data and report provide with
the insights of how effectively they are suing financial techniques such as:
·
Strategic
planning and budgeting
·
Capital budgeting
·
Capital structure
·
Risk management
·
Cash
management
·
Profit planning
and cost controls
The above mentioned strategic financial
techniques are performed in the context of three financial activities:
·
Financing
·
Operating
·
Investing
These three cash flow activities are very
significant for any organization including Nike, these three cash flow
activities help Nike in short term planning by looking into the cash inflows
and outflows, to meet the current or short term obligations liquid funds are
created. The financial analysis is those analyses that make the workings more
improved and more appropriately completed in a way that it will be given the
need and betterment of the working aspects of the organization.
The above figure shows the cash inflows and outflows
by Investing, operating and financing activities of Nike. Blue colour indicates
the Cash inflow/outflow by operating activities, Red colour indicates cash
inflow/outflow by investing activities whereas orange colour indicates cash
inflow/outflow by financing activities.
By looking into this data we see that cash inflow by operating
activities was highest in the fiscal year of 2019, also cash outflow/used by financing
activities was also highest in this year
The detail of this data is discussed below:
Nike's
Net income for the fiscal year 2019 was $4,029m which increased with a
percentage of 52 from last year's net income which was $1933m. Cash provided by
the operations in the fiscal year of 2019 was $5903m, net income adjusted from
non-cash items generated $5341m of operating cash. Changes in other assets
/liabilities and the net change in working capital had an increase in operating
cash by $562m, but in the fiscal year of 2019 cash provided by operations was
decreased by $457m.
Cash used by financing activities by Nike in 2019's
fiscal year is of $5293m and is higher than the cash used in 2018's fiscal year
which was$4835m. 54.3m shares were
purchased of Nike's B class common stock for $4283m, also in 2019, they concluded
their 4 years, 12 million programs authorized by their BODs. In this period of
4 years, 192.1m shares were purchased by this amount of 12m
In the fiscal year of
2019, it was an outflow of cash used by investing activities by Nike of $264m
whereas in the fiscal year of 2018 it was an inflow of $276m which was due to
the change in investing short term. However, there was an inflow of $850m through
short term investments by investing activities. Following these, 21.9% of the
amount was gone in the maturities of short term investments whereas 26.4% was
spent on sales of short term investments, 14.3% were spent in buying property,
plant and equipment.
Critical Analyses of Effectiveness
of Financial Activities 50 Words
The effectiveness of financial
activities in Nike organization helps to get more effective and efficient
workings and it helps to make the workings smoother and improved. The overall
workings use to say that many times when Nike use to work in a way that it
should be then you must get a successful outcome in the overall performance of
the organization.
Relevant financial techniques like Risk
management, cash management, capital budgeting, capital structure,
profitability and cash controls and financial planning and budgeting are used
in decision making while undertaking the cash flow activities; financing,
operating and investing. These cash flow activities not only provide us with
important financial information which helps in developing future strategies,
these activities if combined with relevant financial techniques can help us in
many ways
Now we will be discussing ROA of Nike, ROA is relative to the assets of an organization which
means that how effectively an organization is using their assets to gain
maximum output, in simple words Nike's ROA identifies that how much money they
are making of money they own. Nike's ROA 17.4% in the last year and has
improved from 8.4% from 2018. Similarly, to ROE Nike has improved its profit planning and cost controls which
have a result in their financial position. However highest ROA in Nike's last
five-year performance was observed in 2017 of 19% but then it dropped to 8.4%
in 2018, by observing this decrease in return on assets Nike has surely
improved its performance very effectively and brought its ROA to 17.4%, it
indicates successful profit planning
of Nike, but only relying on Nike's data to determine its market position is
not correct, the right way of assessing ROA of Nike is to look into
competitors/industry ROA. Industry's average ROA in 2019 was 9.84% which is
quite low from Nike's, so it is a good sign for the company that they are
generating more profit from what their competitors are doing
This data shows that Nike has the lowest debt in
comparison with all its competitors. So it indicates that Nike has not to boost
up its ROE by increasing its debt. Its ROE is doing well in the industry in
comparison with its top competitors. So
overall organization is improving with time, also bringing innovation and new
products into the market and grabbing customer's attention through aggressive
marketing strategy has helped Nike to be where it is today. So the company is
doing well according to its current financial data.
I would use the Dividend discount model for valuation
of Nike.
The discounted dividend model is a way to
determine the stock price of a company based on the theory that its stock is
worth the sum of all its future dividend payments, which have been deducted
back to their present value. In other words, it is used to inform shares based
on the present value of future dividends. Upon calculating the relevant data,
Nike's Intrinsic value of the common stock/per share is 117.3 on the current
share price of 85.5, Required ROR is 9.93 and Dividend growth rate forecast for
the next five years is g1=23.4%, g2=19.7%, g3=16.1%, g4=12.5% and g5=8.8%
Capital budgeting is technique is used to assess in
selecting the project which adds more value to the organization, it creates
both answerability and measurability, provides an insight of risks and return
of any project to be undertaken. Cash
budgeting involves identifying cash in cash owes and cash flow rather than
income and expenses arising from investments.
Analyzing Nike’s current and historical financial data, I have come to
one conclusion that the company has faced crises in 2015 and before, since then
the company’s performance has witnessed improvement with every passing year,
this year Nike had its highest revenue and gross profit in last five years
Nike's focus from the start has been to produce
quality products which increase the efficiency of athletes. Quality and
innovation have been a driving force for Nike's success. High innovation and
quality in their product have made them maintain their position in the market
despite extremely high priced products. Top competitors of Nike are Reebok,
Adidas, Puma, Under Armour, Steve madden, etc. Nike has the highest global
market share out of these brands due to its quality production, effective
strategic and financial decision making and their Marketing strategy plays a
huge role in making what Nike is today.
Effective decisions taken by analyzing their financial
data has played a great role in Nike's success. If we study their financial
data, with every coming year we see that Nike learns from its previous year
mistakes and tries to repent and improve.
At year-end 31st May 2019, Nike's total revenue is $39117
which is its highest in last five years and looking into its profit of $17,474,
it is also the highest in the last five years. When we look into this data of
last five years from 2015-2019 we observe a continuous increase in Nike's
revenue and Gross profit. This indicates that with every passing year Nike's
sales have increased which results in increased revenue and gross profit of the
company. Capital planning is procedure is utilized to survey in choosing the
venture which enhances the association, it makes both answerability and
quantifiability, gives knowledge of dangers and return of any task to be
attempted. Money planning includes distinguishing money in real money owes and
income instead of salary and costs emerging from ventures. High development and
quality in their item have caused them to keep up their situation in the market
regardless of incredibly expensive items.
Another Ratio, Price to cash flow ratio, which is more reliable than P/E ratio because
it is not possible to falsify it by internal adjustments of the company, this
ratio would tell us that how much cash is generated from one share rather than
earning per share which does not provide a clear view of how the company is
earning from its equity. This is used while using Cash management techniques
while taking decisions of cash flow activities.
Another ratio of Operating cash flow indicates the exact amount of cash
generated per dollar of net sales
It clears the
relationship between cash generated from sales and operations. It indicates how
effectively the organization converts its sales into cash. Nike's cash flow
margin ratio is 0.15. This ratio enables the use of techniques like cash
management and profitability because if the cash flow margin is increasing
every year it means that free cash flow is increasing and the company cannot
artificially boost up its cash flow margin by not paying into accounts payables
for a longer time. All these above-mentioned ratios are either for
profitability or liquidity gearing, they are used in generating income to meet
the current and long term obligations also they indicate the growth of the
company. When we talk about profitability and cost controls we observe and
analyze the financial ratios of the company.
An important ratio of External financing index provides with the comparison between cash
from financing and operating, it is calculated to examine to which extent the
company is dependent on external financing. Nike's 2019 external financing
index is -0.89 which is a good sign, being a negative value it shows that firm
can pay back stock or debt so the net cash from financing is in negative. Moving towards the Capital structure of Nike, it is 28.1% debt and 71.8% equity,
although ideal capital structure if 50/50%, Nike’s capital structure is somehow
one-sided towards equity
Risk
management as a financial technique is used in these activities to help
organization for minimizing risk, financial data from the balance sheet, income
statement and profit loss account only gives a vague view but these cash flow
activities provides details of every cash inflow and outflow. The current liability coverage ratio is a
measure to demonstrate the company's ability to pay off its liabilities of the
current year from its current year's operating cash. In this ratio, we divide
cash flow from operating activities with the average liabilities of that period
Nike's current liability coverage ratio is 0.76, if this ratio is less than one, it indicates that the business is not generating enough cash from its operations to meet its current obligations. Now Nike needs to work on its financial data of the coming year so that it generates more cash from the operating activities to meet its current obligations. Less current liability coverage ratio would discourage investors from investing in the company. So this ratio would help in both Budgeting and also in Risk management of Nike while taking decisions about operating activities.
In 2019 the Industry's average ROE was
22.76% and Nike's ROE was 42.7%, which is a good sign for the organization,
higher the ROE, better it is for the organization. This indicates that Nike is
generating more profits without requiring as much investment in capital.
Despite all these positive aspects of Nike's ROE, some financial analysts show
their reservation on keeping ROE as the bench because some organizations boost
up their ROE's artificially to gain market value. Increased debt can be the
reason behind it, because when your debt increases, you ROE increases. So below
is the data of Total debt of Nike and its benchmarks
We will discuss ROE (Return on equity) of
Nike and what it indicates. Return on equity basically what an organization
earns from its shareholder equity. Nike's ROE in 2019 was 42.7% which was
highest in the last five years and there's seen a huge improvement from 2018's
ROE which was 17.4%, the lowest in five years. So, this indicates that Nike's
profitability and effectiveness in terms of its equity compared with its financial
data from the past few years seem pretty good. But the correct measure of its
effectiveness would be comparing its financial ratios with the industry ratio.
Financing in Nike uses to work in a way that it is
going to get a higher place while making the things smoother and highly
acceptable for the finance department of the organization. Nike's working is
very smooth in its operating department as they use to operate in a way that these
will be made according to the activities this department use to do in the way
it increases its performance. The financing needs are going to be managed in a
way that they are continuously increasing the working performance of the
organization and they are going to take the organization at a place where Nike
cannot be able to beat other in the competitive market of it and where it makes
the performance at a level that this will highlight the aspects effectively and
efficiently
The financing in Nike is very important as regular
financing helps to take out the all departments working efficiently and
effectively and it allows the betterment and efficiency of the processes very
improved and very mush highlighted things are going to get Nike company to a
higher place. The overall tools and evaluation methods used in the financing
process makes the workings smoother and more appropriate. The corporate
financial reporting is very much important to provide to the financial advisers
as they are going to make the financing again and if they do not know how to
manage the things by having an idea about previous performance then they cannot
be able to make more appropriate financing decisions for further workings. The
reporting must include the working of the financial ratios and the results
these implementations are providing to Nike so that any needed and essential amendment
can be counted for further improvement and betterment of the company
Capital structuring is the very much important and
essential step in making further decisions in the organization that how much
they are going to perform, what is required and what is needed to be avoided. It
should be made according to the appropriate rationale set towards the working
of Nike and it makes the things to be more appropriate within the working
premises of the Nike Company. The financial analysis is based on the appropriate
usage of financial tools and it makes the things to be more effective and more
highlighted as different valuation methods are going to get involved in
proposing appropriate capital budgeting in the Nike organization. The other
valuation methods include the betterments and improvements in the overall
financial services of the Nike organization and they are going to become more
highlighted and appropriate as well that makes the workings more improved and
more advancements have been able to do in the organization. The report towards
financial advisors has been sent in a way that it must include all the ups and
downs of the organization's current performances and it needs to be done in a
way that it will increase its performance more and it will be able to get the
most ideal situations as they will be able to get more proper and better
options for the betterment of the Nike corporation’s workings. The reporting
must be based on facts so that if the report would not be appropriate and it
will not be able to manage the aspects improperly then the whole thing will be
going to be as predicted as it could be and if they're needed any amendment
then it cannot be able to have that as if the things do not become proper
smooth and in a regular flow
The
dividend is that amount that is provided to the Stakeholders of the Nike
regularly as to make sure about the money is excluding from the profit Nike is earning
after its efficient workings. Nike uses to distribute the amount among its
stakeholders in a way that they are going to get the amount of money along with
regular reports that how much would be the profit and how much amount they are
getting out of profit from the business. The rationale towards financial data
analysis application makes sure the things that the dividend is going to be in
the best amount and so that the overall working towards the betterment of the
organization would be in the notice of the higher management of the
organization. The financial tools and valuation methods that are used
appropriately in the working of the organizations are going to get the right
figures of finance invested in the business and it must be able to know the
right amount of profit or issues that are going to be taken out from the
working premises in a way that it needs to become efficient and effective
allowing the things to be more predictive and more original to get outcomes
efficiently and effectively. Nike has several stakeholders and they are going
to get their amount of money when they are aware of the fact that company is
going to get out its profit ratios and company is going to get the outcomes in
a way that they are going to receive money so this makes the things to be more
appropriate and more predicted allowing the things to go smoother and making
the other workings of the organization to be much efficient so that the amount
providing to the stakeholders is in excess to the Nike company.
Summing up all the financial analysis aspects of the Nike organization we can say that Nike is going to be a successful and highly demanding company shortly as it is already in the Shoe market. The overall workings of the Nike company making it more appropriate and more highlighted marks the things that are best for their success rates and those are best for the efficient workings in the organization's success and that keeps the workings of the organizations in a way that it makes the outcomes to be more improved. The operating activities of the Nike organization are highly commendable as they are great in terms of completing Nike’s operations successfully and they are going to get the things allowing the workings to be more approved and more established. The investing activities are noticeable in a way that they surely have the efficiency to make the workings more demanding and more advance as the investment always makes the workings successful and pushes the issues at the back by having a solution appropriately. The overall Nike financial analysis uses to say that they are great in the Shoe market industry.
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