Financial ratios are important for determining how financially successful a company is over the courses of its life or how successful it is compared to others in the same industry. One can compare the company’s ratios over the current year and previous years to see if the company is becoming more successful, less successful, or is maintaining. Financial ratios can also compare a company to another company in the same industry. Figure 1. 1 shows the financial statistics for four different companies chosen from the DOW list as a solid comparison on what the different statistics mean.
Company Nike Coca-Cola Walmart Home Depot Symbol NKE KO WMT HD Current Ratio 3. 06 1. 37 0. 86 1. 34 Return on Assets 12. 38% 6. 58% 7. 04% 18. 30% Return on Equity 30. 22% 27. 57% 18. 46% 116. 06% Return on Sales 11. 61% 16. 60% 3. 05% 7. 92% Total Asset Turnover 151. 32% 49. 16% 800. 36% 208. 04% P/E 25. 6 25. 19 14. 43 22. 4 Total Debt/Equity 28. 7 180. 58 63. 18 406. 99 Times Interest Earned 40. 27 12. 22 9. 49 12. 99 The four companies chosen were Nike, Coca-Cola, Walmart, and Home Depot. They are all major retailers, but from different industries.
Because they are from different industries, it is hard to compare the statistics, but using these four companies gives the basic understanding of what the statistics mean and why they are important. If one looks at the four firms listed in the table, one can essentially put them into a ranking on financial performance, from best to worst: Nike, Coca-Cola, Home Depot, and Walmart. A current ratio of one or less is not ideal when examining financial performance, because it could indicate that the firm has trouble meeting its financial obligations.
If it is less that one, it signifies that current liabilities exceed current assets, which can become a major problem. Therefore, in examining the four companies, one can see that Walmart has a current ratio under one, and Nike has the best current ratio. The return on assets calculation essentially shows how profitable a specific firm’s assets are in generating revenue. Overall, it tells one what the firm can do with what it has in assets. In examining the four companies in figure 1. , one can see that Home Depot and Nike have the better percentages in return on assets, with Walmart and Coca-Cola having the lower return on assets percentage. The return on equity percentage is a measurement of how profitable a company is in relation to the shareholder equity, essentially it demonstrates how well a company uses investments to generate earnings. Once again, from greatest to least, they rank in the following in order in regards to return on equity: Home Depot, Nike, Coca-Cola, and Walmart.
Return on sales is a measurement or indicator how the profitability of a company. The interesting thing about the return on sales percentage is that it can be used internally to assess how the profitability of a company is compared to previous years. However, it can also be used to access performance against other companies. Nike and Coca-Cola come in at the top in regards to the return on sales percentage. The asset turnover ratio is generally a ratio that can be used as an indicator of the efficiency with which a company is utilizing its assets in generating revenue for that company.
Overall, the higher the ratio the better the performance for the company, but this number cannot be compared outside of the industry or makes for a poor comparison. Thus, in regards to understanding, the comparison has been made against the four companies above, but theoretically one could not make this comparison in an actual analysis. In comparing them, the top two are Walmart and Home Depot. A stock’s P/E essentially tells one how much investors are willing to pay per dollar of earnings. A P/E is a very simple statistic, and because it is so simple, it does not consider the growth that the company could undergo.
But, in comparing the P/E’s of the four companies, Nike is, once again, at the top. The debt to equity ratio is a measurement used to assess the capital structure of a business. Simply, the debt to equity ratio is a way to examine how a company uses different its funding to pay for its operations. Nike has the lowest, which is a sign of good financial performance. The times interest earned ratio is a measurement of a company’s ability to honor its debt payments. When the times interest ratio is less than one, the company is not making enough cash to meet its interest obligations, meaning the company is much more vulnerable.
Home Depot and Nike come in at the top in regards to the times interest earned ratio. In regards to the four companies listed in figure 1. 1, there are obviously some major financial performance differences which can be seen easily. However, financial performances might differ so drastically based on the industry that the company is in. The companies might differ in industry differences leading to other differences in how they operate leading to different financial ratios listed in figure 1. 1. The P/E ratios can be very different, as seen in figure 1. 1.
It is only useful to compare companies within the same industry because of different economic or market factors that affect certain industries. After researching and considering the industries, one can know that a company in the utilities industry probably does not grow wild, like a company is the technology industry. This would lead to phenomenally different P/E’s but does not mean that the utility company is “worse”. In regards to the four companies listed above, comparing them to each other does not do them justice because they are from different industries.
Historical Financial Performance of Nike As Nike was the best company of the four companies compared above, one can look at the historical financial performance of Nike and see many different statistics. Displayed in Figure 2. 1, one can see the many different financial ratios for Nike over the last three years. In comparing the financial ratios for Nike over the last three years, one can see many different important financial features. NIKE 2016 2015 2014 Current Ratio 3. 06 2. 5 2. 7 Return on Assets 12. 38% 16. 30% 14. 90% Return on Equity 30. 22% 27. 80% 24. 0% Return on Sales 11. 61% 10. 70% 9. 69% Total Asset Turnover 151. 32% 141. 69% 149. 50% P/E 25. 6 27. 5 25. 9 Total Debt/Equity 28. 7 49. 8 46. 44
In comparing the financial data for Nike over the last three years, one can see that the company’s financial performance is most improving. Starting with their current ratio, it took a dip between 2014 and 2015, but rose significantly between 2015 and 2016, which is a good sign. The company’s return on sales and return on equity have both improved steadily over the last three years, which is another good sign.
The company’s return on assets has decreased, but significantly to a point of worry. In this data, it appears as if the return on assets has fluctuated from year to year. This is an interesting point, so after some financial digging and analysis, it appears that for the previous five years, the return on assets percentage has fluctuated, not so much that one should worry. The company’s total asset turnover has steadily increased over the last three years, which is another great sign for the financial performance of Nike. The P/E has remained constant, but it is a simple number that does not predict growth very well.
Lastly, the total debt to equity ratio has decreased significantly which is another great sign for Nike. Overall, the company most is improving from year to year, and one should be interested to consider 2017 data also. Nike Competitor Analysis As every company has competitors, some of which make a big impact on the financial stability of a specific company. One should look at the company’s direct competitors and understand how the different ratios compare to each other, but most importantly, trying to understand why there are differences is the biggest reason to interpret the data.
In figure 3. 1 shown below, one can see Nike’s biggest competitor’s financial performance side by side with Nike. Under Armour is one of Nike’s biggest competitor because they are identical in the industry. Company Nike Under Armour Symbol NKE UAA Current Ratio 3. 06 2. 85 Return on Assets 12. 38% 8. 05% Return on Equity 30. 22% 13. 98% Return on Sales 11. 61% 5. 86% Total Asset Turnover 151. 32% 138. 14% P/E 25. 6 40. 42 Total Debt/Equity 28. 7 40. 21 Times Interest Earned 40. 27 27. 43
The table listed above shows only one of Nike’s biggest competitors, although there are many more that can be listed, including: New Balance, Adidas, Sketchers, Steve Madden, and Reebok. This is just a short list of direct competitors, because essentially any firm that specializes in athletic shoe production is a competitor to Nike. This selection of competitors makes complete sense and is easy to understand, they all come from the same industry, the athletic shoe industry, thus being competitors.
In regards to the data that was pulled on both Nike and Under Armour, one should look at the data and see how the two companies perform financially. When looking at the data, one can see that Nike is more successful financially than Under Armour is in regards to the data listed in figure 3. 1. Nike outperforms Under Armour in almost every ratio, which is truly phenomenal for Nike. However, one must consider why they are outperforming Under Armour. It is always important to consider the why when comparing financial data for multiple reasons.
So, the question is, why is Nike’s financial performance better than Under Armour’s financial performance? The answer to this question is somewhat complicated because there are probably multiple reasons as to why Nike is outperforming Under Armour. One of the biggest reasons is marketing, does Nike have better advertising than Under Armour? Does Nike have somewhat lower prices that draw more people into the store than Under Armour? Do they have to spend less to get the same result than Under Armour? Are they making a push for “add-on” sales to increase their revenue?
Is Nike constantly producing “new and improved” products and Under Armour is sitting stagnant with creativity? As one can see, there are several different reasons as to why Nike is outperforming Under Armour financially. When one compares the two company’s financial ratios side by side, one can see that Nike is outperforming, but when one looks at Under Armour alone, they can see that Under Armour is not “struggling” financially. Financial ratios are interesting to compare and tell a lot about a company’s past and future.
