Running Head: BUSINESS REPORT 1
Business Report
19042048
Financial decision making
Umadfj-15-m
Word count- 2,500
Table of Contents
BUSINESS REPORT 2
Introduction.....................................................................................................................................3
Long term sources of finance..............................................................................................................3
Working Capital Management...........................................................................................................5
Dividend Policy....................................................................................................................................6
Profitability and Risk..........................................................................................................................8
Summary..............................................................................................................................................9
Appendix 1......................................................................................................................................10
Appendix 2......................................................................................................................................11
Appendix 3......................................................................................................................................13
Appendix 4......................................................................................................................................14
Appendix 5......................................................................................................................................15
Appendix 6......................................................................................................................................16
Appendix 7......................................................................................................................................17
Appendix 8......................................................................................................................................18
Appendix 9......................................................................................................................................19
Appendix 10....................................................................................................................................20
Appendix 11....................................................................................................................................21
Appendix 12....................................................................................................................................22
Appendix 13....................................................................................................................................23
Appendix 14....................................................................................................................................24
Appendix 15....................................................................................................................................25
Appendix 16....................................................................................................................................26
Appendix 17....................................................................................................................................27
Appendix 18....................................................................................................................................28
Appendix 19....................................................................................................................................29
Appendix 20....................................................................................................................................30
Appendix 21....................................................................................................................................31
Appendix 22....................................................................................................................................32
Appendix 23....................................................................................................................................33
Appendix 24....................................................................................................................................34
Appendix 25....................................................................................................................................35
BUSINESS REPORT 3
Introduction
The company that I decided to access is Adidas. Adidas was founded and created in
Germany. Adidas sells and manufactures clothing apparel as well as shoes for sports. Another
reputable brand in UnderArmour. UnderArmour was founded by a college student in
Maryland, USA. These companies annual report of their financial statements gives us insight
on finding several different things such as the gearing ratio, liquidity, and but not limited to
shareholders returns. This report will show how each company is different/better by going
behind the numbers.
Long term sources of finance
The risk or return characteristics of internal and external are essential to any business.
Weighing the pros and cons of each could make or break your business. Under the "Internal,"
you have internal equity or retained earnings. Under the umbrella of "External," you have
external equity, debt, and loans.
The first thing that you want to do is go to your retained earnings. Your retained
earnings are a direct correlation to what you have after you pay your "bills" essentially. The
2nd thing you want to do if that doesn't work is go for convertible debt. This is where you
borrow from another investor to convert it into equity. After your company is in its regular
operation, you can go on and finalize the agreement as had been previously made. External
equity is your last resort. Internal financing, when available, is preferred over external
financing.
Internal is good because it’s cheaper. The risk of that, however, is that you may use
all of the company's money, and won't have enough for things like the day to day operations
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or have enough money to pay out the dividends. Shareholders want dividends paid out to
them for various reasons.
Debt and taking out loans are better than external equity. When you take out debt,
there’s a tax shield. Companies prefer to go in debt so that they wouldn’t have to pay high
taxes. Interest on debt is a tax-deductible expense; taking on debt creates a tax shield. Since a
tax shield is a way to save cash flows, it increases the value of the business (Philippe Gaud,
2007). The more the company tries to create more tax shield through taking debts, the more
the company is put in financial distress, which in the long run can result in bankruptcy.
External equity outlines the competitiveness of a salary vis-à-vis the market. If not
adequately reviewed, it can be risky for a company that wants to retain its employees; hence
the shareholders may not like it as was mentioned earlier. Dilution of shares isn't a good thing
for the shareholders because that means that it’s less pay-out for them. The more the money
that goes around, the lesser the amount you will receive. Also, shareholders of a company
have a little to say, but taking part in the voting process that often takes place annually can be
an excellent start to air your opinions or sell their shares.
According to the pecking order theory, financing cost increases with asymmetric
information. Also, a company's finance originates from three distinct sources, new equity,
debt, and internal funds. The static trade-off theory outlines that a firm can choose how much
equity and debt finance to exploit through balancing benefits and costs. You can also have
external equity and debt; however, the key is that you need a balanced mix of debt and
equity. Companies tend to try and find a middle ground between the two. Adidas is using
static trade-off theory because they have a mixture of debt and equity. Based on their annual
report, they have bank borrowings, including commercial paper and loans. These borrowings
suggest that the company chose the pecking order theory. In his studies, Kumar, 2019
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outlined that the company has been showing a lot of focus from shifting to the Pecking order
theory from the Static trade-off theory. The pecking order theory assumes that there’s no
target capital structure. Static trade-off theory refers to using debt and equity in an optimal
ratio to finance a company.
Adidas records a gearing ratio [Appendix 1] of 20% and 14% in 2018 and 2017,
respectively. According to Claire Boyte-White,2019, an ideal gearing ratio should be between
25% and 50% since anything higher that the range would be deemed highly geared. This
may, in turn, put the company a high financial risk as to the high-interest rates and low profits
times; the firm will be more susceptible to loan defaults and bankruptcy. If the ration is below
the range the there’s a low risk by lenders and investors to a company. As for their rival UA
in 2018, their gearing ratio was 26%, and in 2017 their gearing ratio was 27%; this means
that UA has an ideal gearing ratio. It’s essential to balance costs and benefits for a company
to assist in choosing debt or equity finance they will use according to the static trade-off
theory.
Working Capital Management
The companies also take a distinct move when it comes to deciding whether to move
goods faster, the aggressive approach, or stop chasing receivables (conservative approach).
Capital Management theory illustrates how a company can focus on maximizing the
efficiency of its cash flows, which can be done in two ways: being aggressive or
conservative. The working capital cycle eludes to how a company uses its cash. More
aggressive working capital policies are associated with higher returns and risks. In contrast,
conservative working capital policies are associated with lower risk and return as the business
will have a high solvency and liquidity levels and can access with ease some short-term
borrowings to cover any needs in the working capital.
BUSINESS REPORT 6
Adida's cash conversion cycle [Appendix 7] shows that they take on the conservative
approach. In 2018 Adidas CCC was 116 Days as opposed to 130 days in 2017. A positive
CCC implies that you pay off your debt before your creditors come and pay you. Positive
cash cycle means at a current state of operations; the entity is taking more time to generate
cash as compared to the time required to make payments. UA is no different from this
because they have a CCC of 104 days in 2018 and 124 days in 2017.
The 2017's ratio of 1.4 meant that for every $1 of current liability that falls due, the
company had $1.40 to meet it, which was the same even in the following year, 2018. For UA,
with the ratio of 2 meant that for every dollar that fell due, it had $2.0 to meet it. Both
companies in both years were able to meet it with money left over to go towards other things
in the company.
The quick ratio was a different outcome. In 2017, the Adidas quick ratio [Appendix 3]
was .8. This means that in 2017 for every $1 of liability falling due, the company has 0.8
cents to meet it. In that year, the assets can't meet the liability. In 2018 for Adidas, their quick
ratio was .9. This means that in 2018 for every $1 of liability falling due, the company has 0.9
cents to meet it. In that year, the assets could not meet the liability. In 2017 for UA, their
quick ratio was 1.2. This means that in 2017 for every $1 of liability falling due, the company
has $1.2 to meet it. In that year they could meet it and had a surplus of 20 cents. In 2018 UA
had a quick ratio of 1.1. This means that in 2018 for every $1 of liability falling due, the
company has $1.10 to meet it. In 2018 they could meet it and had a 10-cent surplus.
Dividend Policy
Every publicly listed company has a dividend policy. The purpose of a dividend
policy is to determine how a company pays dividends. What is that company policy on
paying dividends? There are several different policies on dividends. There’s the dividend
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irrelevance theory that means that paying dividends is irrelevant, don't pay dividends to your
shareholders. Do not pay them because of the money that you use for paying them you could
use for other projects to invest in. That would then increase the value of the business. The
bird in hand theory, which simply means that you would instead invest the money now than
in the future. The clientele approach is saying, as a company, we want to attract a specific
type of investor. As a business, what do we want is a question asked when using this theory.
Do we want someone who wants to invest now or in the future? In most cases, you would
desire the future investor when your company's value is higher than the current value. It
would thus be useful to invest more in projects than pay your shareholders. More project
increases the business value, thus attracting more investors or clients.
Lastly, the signaling theory, a policy a company uses, which sends signals to future
investors. For example, if a company lowers its dividends, that will then send out a signal to
future investors that the company isn't doing well. If the dividends are high, you should not
use them in paying your shareholders. This would send a signal to future investors that your
company will be doing well.
Adidas is paying a dividend of $3.35 in 2018 as opposed to $2.60 in 2017, which
means that it has increased. The company is making more profit, which suggest they’re using
the bird in hand theory since the increase in profit would be created not by using dividends to
pay shareholders but investing them to gain more profit. From a deep analysis of the financial
statement, the company made a higher profit in 2018 as compared to 2017. Which could be a
reason for increased dividends in 2018. In 2018 the dividend pay-out ratio [Appendix 19] was
39% and 37% in 2017. This represents the percentage of dividends paid from profits after tax,
and the increase is a good start after one year, which would be a bigger value in the sight of a
future investor.
BUSINESS REPORT 8
Profitability and Risk
Return on capital employed (ROCE) determines how much the company gains from
the capital it employs. After some time, you will have to weigh the output versus the input to
determine gain. Adidas ROCE [Appendix 14] is 30% in both 2018 and 2017. This means
they get 30% returns on the capital they employ. Their opposition, however, has a ROCE of
0.9% in 2018 and 1% in 2017.
Adida's net profit margin [Appendix 15] in 2018 was 11%, and 10% in 2017 speaks
on the profit that a company is making from its sales. Their rivalry UA in 2018 was at 0.5%
and 0.6% in 2017, which shows that they were not investing a lot of capital to obtain sales.
Capital turnover refers to how many times the capital invested is being turnover into sales. In
2018 Adida's capital turnover [Appendix 16] was 2.7 times as opposed to 3.0 times in 2017.
Their competitor UA was at 1.9 times in 2018 and 1.8 times in 2017. The gross profit margin
eludes to the profit after the company takes out its cost of sales. In 2018 Adidas had a gross
profit margin [Appendix 17] of 52% and 50% in 2017. UA was at 45.1% in both 2018 and
2017.
Return on investment tries to measure the amount of return on a particular investment
directly. In 2018 Adidas had an ROI [Appendix 18] of 27% and 18% in 2017. UA was at
2.3% in 2018 and 2.4% in 2017. The Capital Asset Pricing Module or "CAPM" is a single-
factor linear model that relates the expected returns of an asset and a market portfolio, in
which the slope, called asset beta, serves as a measure of asset non-diversifiable risk. CAPM
can be used to calculate the amount of equity you should be expecting from your company
after all investments have been made withholding the deductibles.
PEST analysis is essential to every business. These are the factors that affect a
business. Adidas is a global company, so they must ship things from continent to continent,
BUSINESS REPORT 9
meaning this requires them to extend international supply chains and follow administrative
procedures when selling products online (Kiesha Frue, 2017). Each country also has different
rules regarding taxes, which Adidas has to abide by as well. Those are different political
factors they face. As far as the economic factor they face, counterfeit’ssues are a huge
problem—the rise of counterfeit products dampers Adidas sales (Kiesha Frue, 2017). Adidas'
social factor becomes more and more prevalent in today's society.
People are becoming more and more health-conscious. It means that they want to
address the health-related issue and live an active lifestyle. For this purpose, people will need
sports footwear, apparel, and other related fitness accessories. It can positively affect the
demand for the footwear and apparel industry. (Umar Farooq, 2019). We live in a very fast-
paced world in terms of technology, which is ever-changing. Adidas must adapt to this
technological shift, which they have done in terms of speed factories, which speeds up
production. It still needs to expand this technology to other factories in Asia and other
locations. (Umar Farooq, 2019) Those locations are big markets, and because Adidas doesn't
have speed factories, other companies could pounce on that opportunity and cause Adidas to
miss out on that market. The Minsky analysis, also known as the Minsky moment is a
sudden, major collapse of asset values which marks the end of the growth phase of a cycle in
credit markets or business activity. He recognized early that the recent development of global
capitalism would lead to rising financial fragility. The deregulation process, in connection
with a monetary policy controlling inflation, deepened financial instability, and shifted power
to the markets (Minsky, 1986).
Summary
It’s quite remarkable to notice throughout the research how Adidas outshines its
competitor UA. An investor would be looking for a company with a high market value in the
future than the present. As a business, Adidas is aware that making investments can result in
BUSINESS REPORT 10
higher future profits. This would, in return, attract more investors in the future, which means
a big future for Adidas. The engagement in the global market is also a good idea for Adidas
as this opportunity can be used to reach global customers and attract more international
investors. When it comes to choosing a company, how much you expect from it’s determined
by the company's ability to grow a good pace, which has been witnessed form the net profit
registered in 2017 and 2018. The constant growth would mean that a single share made to
Adidas will be a great deal in the future. Actually, as an investor, you should ask yourself
these questions; what is the company's history? Is the business competitive? And how big is
the market opportunity for the company? After all these, it would be the best deal to invest
with Adidas.
BUSINESS REPORT 11
Appendix 1
Gearing Ratio
Long term liability__________
Long term liability + Equity
Adidas(2017) Millions
983___= 983__
983+ 6,017= 7,000 14%
6
Adidas(2018) Millions
1,609______= 1,609 20%
1,609+6,364 = 7,973
UnderArmour(2017)
765,046_____= 765,046_
765,046 + 2,783,688 = 2,783,688 27%
UnderArmour(2018) 1%
703,834_____ = 703,834
703,834 + 2,016,871 = 2,720,705 26%
BUSINESS REPORT 12
Appendix 2
Current Ratio
Current Assets___
Current Liabilities
Adidas(2017) Millions
8,645
6,291 1.4:1
Adidas(2018) Millions
9,813
6,834 1.4:1
UnderArmour(2017)
2,337,679
1,060,375 2.2:1
UnderArmour(2018) 20%
2,593,628
1,315,977 2.0:1
BUSINESS REPORT 13
Appendix 3
Quick Ratio
Current Assets-Inventory
Current Liabilities
Adidas(2017) Millions
8,645-3,692 = 4,953
6,291 = 6,291 0.8
Adidas(2018) Millions
9,813-3,445 = 6,368
6,834 = 6,834 0.9
UnderArmour(2017)
2,337,679-1,158,548 = 1,179,131
1,060,375 = 1,060,375 1.1
UnderArmour(2018)
2,593,628-1,019,496 = 1,574,132
1,315,977 = 1,215,977 1.2
BUSINESS REPORT 14
Appendix 4
Inventory Days
Inventory X 365
Cost of goods sold
Adidas(2017)Millions
3,692 X 365 = 1,347,580
10,514 = 10,514 128 Days
Adidas(2018) Millions 9
Days
3,445 X 365 = 1,257,425
10,552 = 10,552 119 Days
UnderArmour(2017)
1,158,548 X 365 = 422,870,020
2,737,830 = 2,737,830 154 Days
UnderArmour(2018) 24 Days
1,019,496 X 365 = 372,116,040
2,852,714 = 2,852,714 130 Days
BUSINESS REPORT 15
Appendix 5
Receivable Days
Account Receivables X 365
Sales
Adidas(2017)Millions
2,315 X 365 = 844,975
21,218 = 21,218 40 Days
Adidas(2018) Millions
2,418 X 365 = 882,570
21,915 = 21,915 40 Days
UnderArmour(2017)
609,670 X 365 = 222,529,550
4,989,244 = 2,2737,830 45 Days
UnderArmour(2018) 1
Day
652,546 X 365 = 238,179,290
5,193,185 = 5,193,185 46 Days
BUSINESS REPORT 16
Appendix 6
Payable Days
Account Payable X 365
Cost of goods sold
Adidas(2018) Millions
2,300 X 365 = 839,500
21,195 = 19,537 43 Days
5
Adidas(2017) Millions
1,975 X 365 = 720,875
19,195 = 19,195 38 Days
UnderArmour(2018)
560,884 X 365 = 204,722,660
2,852,714 = 2,852,714 72 Days
UnderArmour(2017) 3
561,108 X 365 = 204,804,420
2,737,830 = 2,737,830 75 Days
BUSINESS REPORT 17
Appendix 7
Cash Conversion Cycle
(Inventory Days + Receivable Days) – Payable Days
Adidas(2018)
119 Days + 40 Days – 43 Days= 116 Days
14
Days
Adidas(2017)
70 Days + 40 Days -38 Days= 130 Days
UnderArmour(2018)
130 Days + 46 Days – 72 Days= 104 Days
20 Days
UnderArmour(2017)
154 Days + 45 Days – 75 Days= 124 Days
BUSINESS REPORT 18
Appendix 8
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Appendix 9
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Appendix 10
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Appendix 11
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Appendix 12
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Appendix 13
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Appendix 14
Return on Capital Employed (ROCE)-ADIDAS
Profit before interest & tax (PBIT) *100
Shareholder fund + long term debt
2018 2017
2,368_______ *100 = 30% 2,070___ *100= 30%
6,377 + 1,609 6,032+983
BUSINESS REPORT 25
Appendix 15
Net profit Margin-ADIDAS
PBIT *100
Sales
2018 2017
2,368 *100= 11% 2,070 *100= 10%
21,195 21,218
BUSINESS REPORT 26
Appendix 16
Capital Turnover-ADIDAS
Sales_______________________ *100
Shareholder fund + long term debt
2018 2017
21,915_____ = 2.7 times 21,218____ = 3.0 times
6,377 + 1,609 6,032+983
BUSINESS REPORT 27
Appendix 17
Gross Profit Margin-ADIDAS
Gross Profit * 100
Sales
2018 2017
11,363 *100= 52% 10,703 *100= 50%
21,195 21,218
BUSINESS REPORT 28
Appendix 18
Return on Investment-ADIDAS
Profit after tax___ *100
Shareholder fund
2018 2017
1,704 *100= 27% 1,100 *100= 18%
6,377 6,032
BUSINESS REPORT 29
Appendix 19
Dividend Payout ratio
Dividend paid_ *100
Profit after tax
2018 2017
666__ *100 =39% 528__ *100= 37%
1,704 1,100
BUSINESS REPORT 30
Appendix 20
Return on Capital Investment- UA
2018 2017
(25,107)_________ *100= 0.9 27,843__________ *100= 1.0
2,016,871+703,834 2,018,642+765,046
BUSINESS REPORT 31
Appendix 21
Net Profit- UA
2018 2017
(25,017)_ *100= 0.5 27,843__ *100= 0.6
5,193,185 4,989,244
BUSINESS REPORT 32
Appendix 22
Capital Turnover-UA
2018 2017
5,193185________ =1.9 4,989,244_______ = 1.8
2,016,871+703,834 2,018,642+765,046
BUSINESS REPORT 33
Appendix 23
Gross Profit Margin-UA
2018 2017
2,340,471 *100= 45.1 2,251,414 *100= 45.1
5,193,185 4,989,244
BUSINESS REPORT 34
Appendix 24
Return on Investment-UA
2018 2017
(46,302)_ *100= 2.3 (48,260)_ *100= 2.4
2,016,871 2,018,642
BUSINESS REPORT 35
Appendix 25
CAPM
ERi= Expected return of investment
Rf= Risk free rate
Bi= Beta of the investment
(ERm – Rf) = Market risk premium
CAPM Adidas
ERi= Rf + Bi (ERm-Rf) = 1.1 + .68 (5.7-1.1)= 4.2
Risk free rate- 1.1
Bi= .68
(ERm- Rf)= 5.7-1.1
CAPM UA
ERi= Rf + Bi (ERm-Rf) = 1.68 + .57 (4.30)= 4.1
Risk free rate- 1.68
Bi=.57
(ERm-Rf)= 1.68-.57
BUSINESS REPORT 36
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