Financial Analysis of Nike Inc

Ella Wallfur Skiljic & Arnau Rodriguez

Dr. Wei Feng

Fin-319

November 18, 2022

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Background study

Nike Inc is one of the most well-known multinational corporation that was founded in 1964

in the United states. Nike is known for their design and development of quality footwear,

apparel, equipment and accessories. The brand alone was valued more than $32 billion in 2020,

and was named one of the most successful clothing brands in the world during the same year

(Wikipedia contributors, 2022). They sell their products through retail accounts, distributors, and

subsidiaries all over the world, and their products are produced not only in their home country

but also internationally. Their mission statement is to “bring inspiration and innovation to every

athlete in the world” (Bring Inspiration and Innovation to Every Athlete in the World, n.d.).

Strength:

- The main strengths of Nike are that the company has a strong brand awareness and a

strong Brand name. Since Nike is one of the most successful clothing brands in their

industry, most people know about their name and associate the company with good

quality

- Another strength is that Nike has a customer base worldwide. This allows the company

to attract many more customers and spread their brand further.

- Campaigns are also a great strength for Nike. The work very well with making great

campaigns and are linked to many famous athletes that promote their products.

Weaknesses

- A weakness for Nike is their association with bad labor and working conditions

abroad. The company works with outsourcing all over the world, which makes it harder

for them to control the conditions in all factories.

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- Another weakness about outsourcing is that Nike can’t always keep track on the goods

that are being produced, which means that the quality of the products won’t be the same

in every country. This lower Nike’s brand image as offering high quality products.

Opportunities

- One opportunity for Nike is to produce more products out of recycled goods, which

would associate them with supporting environmental causes. This will give their

customers a message in the right direction.

- Nike has the opportunity to expand their brand further by introducing other fashion lines,

such as accessories. Because of their association with famous celebrities Nike has the

opportunity to quickly introduce new fashion lines and create a demand for them.

Threats

- The threats for Nike are that they are continuously accused for their bad labor and

working conditions and inconsistent quality of their products. They, therefore, has to fix

their image in the international market.

- Nike also has to be aware of the recession that makes customers become more aware of

the price. There is a threat from other companies that are lowering prices, as well as third-

part shops that are selling Nike’s products for cheaper prices.

Financial ration analysis

a. Return analysis
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Trailing returns are a measurement of an investor's performance over a specific timeframe,

often one year. They are computed by taking the actual price from the investor's price at the start

of the period and afterwards the result is divided by the price at the start of the period. We can

see how Nike, Industry and Index are all on a negative number after the first year, which means

that the performance of the investors is not good at all. Nike is the worst one compared with

Industry and Index after the first year with –43.87 which is worse than the –42.47 from Industry

and –16.78 of Index. After the first year, all three were able to improve their performance with

the investors and ended up in positive trailing return, being Nike the lowest one again. By time

we can observe how Nike is able to improve their performances and after year 15, Nike will be

the best one compared with the industry and index, meaning that for the investors will be the best

option into which they can invest.

b. Valuation (market ratio)

Price/Sales demonstrates how highly the market values each dollar of the income statement.

To determine it, start dividing the industry's market capitalization by its overall sales for the

previous year. Nike has stable low values for this ratio where the highest one was in 2020 with

5.9. After this, it dropped to 2.99, which is the current price per sales but is expected to increase

to 4.18 in 5 years.

The price/earnings rate, in effect, reflects the quantity of money an entrepreneur may

anticipate buying stock in a firm in order to obtain $1 of that business' performance. This ratio
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assists investors in determining the market price of a share in relation to the industry's profits In a

nutshell, it reflects whatever the industry can pay for a share now depending on its previous or

prospective profits. For Nike, we can see that this ratio is pretty high during all the years, where

Nike arrived to its peak in 2020 with 75.93, so that means that the stock price of Nike was high if

we compared with their earnings. This is totally related to the COVID pandemic, and then after

their earnings improved in 2021, P/E went down to 43.75.

Price/cash flow ratio is an inventory price indicator or multiplier that compares the price of a

share to its operational cash flows per share. The measure employs operational cash flow, which

includes costs that are non-cash like amortizations and depreciation in addition to net revenue.

Nike’s values for this ratio are similar to price/earnings ratio, where now Nike was also in the

highest number in 2020, with 75.88, which means that for every dollar of cash flow, Nike will be

paying $76. This is a high number, which Nike and in price/earnings improved and brought it

down to 39.16 for every dollar of cash flow in 2021.

Price/book contrast a company's market capitalization with its book value. Is frequently

employed by professional investors seeking undervalued equities in the industry. Price/book

ndicates the value that industry players place on a firm's shares in relation to its valuation. If the

value of this ratio is low, it means that the share of the company is undervalued, but it can also

tell that something of the company is going wrong. Nike value of this ratio is really low from

2012 to 2017, which means that during these years, the stock of Nike was below the price it

should have been. In 2020, Nike was at the highest number of this ratio with 20.96, which it

means that now is more overrated than the years before. Currently, Nike Price/book is 8.7, which

means that Nike’s share is again underrated of the price it should be.
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Price/forward earnings is a ratio that helps to estimate the earnings of a company for the

next period of time. It could, therefore, help to estimate future revenues and other financial data

for the upcoming period. For Nike we can see that the ratio is pretty high, during 2020 it was

specifically high and that is most likely because Nike grew their revenue during 2021 compared

to 2020 when their revenue dropped. The ratio can help investors to compare the price of the

stock to the estimation of the company’s future earnings.

PEG Ratio measures the value of a company’s stock, while taking into consideration of

market price, future growth, and the company’s earnings (Berger, 2021). It’s a ratio that can help

to understand the expected rate of growth for a company. The past years Nike has had a very

high PEG ratio, almost at 2 or above. This would indicate to investors that it is time to sell the

stocks, rather than buying.

Earnings yield % is used by investors see and find stocks that are undervalued. Nike has a

much higher current ratio than the past 5 years. However, we can see that 10 years ago they

where closer to the ratio we can see today. Usually a ratio that is above 7% is considered being

undervalued. Since Nike has a ratio much lower than that and hasn’t been close to 7% the past 10

years we can conclude that their stocks most likely are not undervalued.

Enterprise value (Bil) has grown for NIKE significant the past years, specifically during

2021. This ratio is a measurement of the company’s value as a whole. This high number could be

an indicator that Nike stock is overvalued.

Enterprise value/EBIT is used when measuring if a stock of a company is high or low in

comparison to the market or stocks that are similar. Nike has a very high ratio and it has grown

the past year, which means that their stock is pretty high compared to the market.
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Enterprise value/EBITDA is similar to the ratio above, but also included amortization

and debt in the calculation. This ratio is best used when comparing the enterprise value of

companies within the same industry. Usually, a value of 10 and below is seen as a desirable

value. Looking at Nike, they have a very high EBITDA and has during the past years. This

means that the company might be overvalued.

c. Growth

Revenue: The revenue the past 10 years has slightly gone down since 2012. During 2020

it was at one of its lowest points, the same trend can be seen during the past three and five years,

were the average went down even more during the same year. The reason for this is that when

we look from year to year, 2020 is the year where the percentage average has decreased most

significant, and even reached a minus. The reason for this is because 2020 the pandemic hit,

which affected the world economy tremendous and also decreased the customers purchasing

power. However, we can see that the company recovered pretty fast during 2021 and had a

higher revenue than at any point the past 10 years, which made the average go up significant

again. Comparing the average between 1, 3, 5, and 10 years we can see that the 1-year average

differs significantly more than the 10-year average. This indicates that even though Nike has had
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a much lower revenue percentage one year, it does not affect them too much in the long run

because they have the ability to recover from them. This shows investors that Nike has a pretty

stable revenue growth.

Operating income: the growth of the operating income follows pretty much the same trend

as the growth of the revenue. 2020 is the year where we can see a significant difference from

previous years, which means that Nike earned a lower profit from the operations this year. Most

likely because of the pandemic and the change in economy during this year. However, if we look

at the ratio over 3,5 and 10 years we can see that during 2021 it has recovered pretty fast from

2020s downfall, which is a good indicator for investors because it means that Nike has a very

stable ration and can survive despites challenges that are out of their control.

EPS: This ratio indicated how much money the company will make for each share of its

stock, which is important for investors to compare and analyze against competitor when deciding

whether or not to invest. The ratio is also important for the company because if the EPS is

higher, investors might pay more for the shares. It could also be a great indicator for how the

future growth of the company will look like. Looking at the growth of the ratio we can see that

during the 10-year average was much higher 10 years ago than what it is today, this could be

explained by looking at the year over year average, because 2018 and 2020 the ratio went down

significantly, which would affect the average over a longer period of time. However, during

2021 the ratio was at its highest point and grew significantly from previous year. Which also

made the 3,5- and 10-year average to grow. For investors that analyze this ratio it is important to

look at it over time because it indicates how Nike might develop in the future. For example, if

investors looked only at the year over year ratio 2020 it might have falsely implied that Nike will

follow this trend, when the downfall most likely happened because of the pandemic.
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d. Operating efficiency

The return on asset has been pretty stable during the years and varies between 14-17%. We

can see a significant lower ratio during 2018 and 2020. The explanation for this could be that

during 2020 when the pandemic was at its peak, costumers did not purchase as much, which

affected NIKE’s profitability in relation to its assets. The net income most likely went down,

which gave them a lower ration. Overall, the ratio is pretty stable and varies from year to year.

This shows the investors that NIKE uses their assets efficient every year in order to generate

profit, which would benefit an investor.

The return of equity has grown more significant during the past 10 years, besides a drop

during 2020 and 2018. The explanation for this would relate to the return on assets, most likely

the net income went down during 2018 and 2020 which lead to a lower ration. The increased

growth from 2012 does, however, indicated that Nike has a much greater net income the past

years. The increasing ROE is a good indicator for investors because it shows that the company is

earning a greater profit with the money shareholders invest, which means that Nike generates

investment returns.

The receivable turnover ratio has grown the past 10 years from being at 7.52 2012 and

has a current number of 10.14. During 2021 we can see that the ratio grew significantly, but the
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year after it went down again. This indicates that during 2021 the company worked very efficient

with collecting outstanding balances from clients. The high rise during 2021 could be because

the clients was able to pay off their accounts more quickly when COVID slowed down. The

growth of the receivables turnover ratio is also a great indicator for investors to see how Nike is

doing compared to their competitors, and by showing a growing rate, the company shows

investors that they are continuing to grow and are worth investing in.

The inventory turnover ratio was higher 10 years ago than what it is today. This means

that the company turn its inventory relative to the COGS lesser times during the recent years.

There is not a significant difference but the lower turnover ratio indicates that the company is in

a decrease in sales, or have too much inventory. The pandemic might also be a reason for the

lower ratio because there have been tremendous supply chain disruptions.

The asset turnover ratio has also gone down the most recent years, which means that

the company uses their assets less efficient. Nike has during the recent years generated less sales

from its assets. For investors, this ratio could help them understand how good Nike control their

merchandise and how efficient the company is. This could be a factor to take into consideration

when deciding if it’s worth investing in a business.

The fixed asset turnover ratio has gone down more significant than the other ratios,

which indicates that Nike has a lower operating performance the recent years. The company is

therefore generated fewer net sales from their fixed assets, such as property, plant, and

equipment. For investors, this indicates that Nikes ability to sell their products is lesser each

year, because they generate less money for each dollar of their fixed assets.

e. Financial health
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The current ratio for Nike is pretty good. Some years it has reached a little bit to high

(above 3), but most of the time it lays around 2.5 which is pretty good current ratio. This

indicates that Nike has a good capacity to pay its short-term liabilities that are due the current

year. In order to reach an optimal current ratio around 2.0, they could try to increase their current

liabilities. This ratio is important for investors because it tells them how financially strong a

company is in the short-term. It helps them understand how quickly the company can convert

assets into cash, so they are able to pay their short-term liabilities. Basically, it tells the investors

how much cash a company has and how efficient their management is (Borad, 2022).

The quick ratio, compared to current ratio only uses the most liquid assets when

calculating the formula. Which means that this ratio will tell us how quickly the company can

turn pay its short-term liabilities with already existing cash (Corporate Finance Institute, 2022).

A quick ratio us usually considered good if it is above 1 and indicates to investors that the

company is able to pay off liabilities (DeWitt, 2022). Looking at Nike’s quick ratio we can see

that it has been very stable the past 10 years and never reached under 1, which indicates that the

company is financially healthy.

Financial leverage is an indicator of how well a company is using the money borrowed

to finance operations within their business and an opportunity to find different ways to finance a

business. A financial leverage ratio less than one is usually optimal, a higher ratio than 1 can be

evaluated as risky for investors because it usually comes with higher interest payments.

Considering this, Nike has a very high financial leverage ratio and it tends to grow for each year.
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Debt to equity ratio is a way to measure the financial leverage of a company. It implies

how much money a company has in debt for every 1 dollar of equity. Nike’s debt to equity ratio

is pretty low, except for 2020 when it grew significantly. The reason for this is most likely

because during 2020 the economy was affected by the pandemic, which could have caused

higher interest expenses. Nike’s generally lower debt to equity ratio does, however, indicate to

investors that the business is financially healthy and has a lower risk reaching bankruptcy.

The book value per share is used by investors to find the value and actual prices of a

stock, which helps them understand if what they are investing in is undervalued or overvalued.

The ratio indicates how much each shareholder will receive for investing in a company.

Compared to the previous two years we can see that Nike’s book value per share has increased,

which is typically a good sign for the investors because it shows that Nike has strong assets,

while it has lesser debt. This would indicate a positive future for the stock price of Nike.

f. Cash flow

-
Operation cash flow growth %: As we can see in the table, Nike’s Operation cash flow

growth in % increased from December of 2012 to December 2021, with a difference of 163% in

between these 9 years. There have been a couple of years like 2014 and 2016 that the operation

cash flow growth was negative, but after in the next year Nike always recovered this % and was

positive again. In 2020, Nike had the worst Operation Cash Flow growth which was –57.90%.

This was due to the COVID-19 pandemic which made the cash generated by Nike decrease

extremely. After, in 2021 we can see how this percentage increased extremely until 167.89%,
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which we can interpret that Nike has been working hard to recover all the cash inflows and

outflows that they lost in 2020 because of COVID.

Free cash flow growth %: Free cash flow tells us how much money the business has left

over after having paid its operational costs as well as financing costs. Free cash flow for Nike has

been low in most years, which was negative in 2012, 2014, 2016, and 2020. In 2021, Nike ended

the year with a free cash flow growth of 326.16%. Which is a huge number compared with the

last 8 years for Nike. The reason of that increase in the free cash flow is because of increased

revenue, greater productivity, decreased costs, share stocks, dividend distributions, or reducing

debt.

CapEx as a % of sales: The Capex to Revenue ratio compares a firm's investment

opportunities in assets, processing facility, and supplies to its overall revenue. The factor

demonstrates how vigorously the business reinvests its income in productive capital. A high

number may suggest that a business is deeply interested in investing, which can be either a

positive or negative indication based on how successfully those investments are used to generate

new revenue. As we can see in the numbers, Nike doesn’t really have high numbers for this

factor meaning that compared to their overall revenue Nike doesn’t really invest as much as they

could do to improve their revenue. The highest number of this section was 3.53 on 2016, and

currently as of December 2021, the percentage is 1.56%.

Free cash flow / Sales, Free cash flow / Net income, Free cash flow / Share: Free cash

flow to sales is a performance ratio which compares operating cash flows after deducting capital

expenses to revenues. Free cash flows are an essential metric for evaluating the performance of

the business and actual value. The numbers for free cash flow to sales have been constant during

the year but in 2020 due to COVID-19 this percentage dropped from 12.23% to 3.74%. After
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this, Nike was able to increase again from 3.74% to 13.39%, meaning that Nike generated

13.39% free cash flow from every dollar of revenue with the selling of their merchandise and

services as well.

In terms of Free cash flow to Net income, Nike has been constant on this section with

really small numbers, where mostly all the years are below 1%. It arrived at its peak in 2018

where it was 2.03%, after this it dropped the next 2 years until 2020 where it was 0.55%. After

this Nike has been able to bring these numbers up from 0.55% to 1.04%. Free cash flow per

share is an indicator of a corporation's economic adaptability calculated by dividing free cash

flow by the total number of issued shares. This metric is used as an indicator for variations in net

income. For this metric, Nike arrived at its peak in 2019, where it was at 3.09%. After 2019, free

cash flow per share dropped to 2.14%, but Nike was able to make it raise to 2.39%. When free

cash flow per share increases, it means that the company will produce higher cash flow than

would be necessary for operating and capital spending. In this case, it increases just 0.25% which

means that Nike was able to produce just a little bit more cash flow than they need for their

expenses.

g. Any interesting statistics

One interesting thing that we can find among almost all the ratios is how significantly many

of them changed and declined during 2020, which indicates how hard the pandemic affected

many businesses. However, it is specifically interesting to see how well Nike recovered and

managed to raise many of their ratios during 2021. The statistics, therefore, show us that Nike

made great financial decisions during 2021 that moved their business forward instead of

continuing to decline. It shows great value for the future growth of the company when investors

look at it, and that Nike is financially strong.

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Discussion of financial decisions

2021 was a year of growth for NIKE although the pandemic outbreak during 2020 that closed

many brick-and-mortal retails stores. The reason why Nike still managed to increase their

revenue was thanks to a great financial decision of investing more in e-commerce channels. Nike

managed to increase their customer engagement by investing in e-commerce and their app,

where they for instance focused on the home workout trend. Their financial investment in new

innovative platforms that engaged more customers has increased their revenue, total assets, and

free cash flow ([Link] Staff, 2021). An example of a decision that managed to help

Nike grow was the introduction of the SNKRS app, that has grown about 80%. This has helped

to engage customers in the brand by introducing them to fitness and health habits.

Another financial decision that Nike value is to pay out dividends, to show that they are

confident in their financial abilities. During 2020 when COVID-19 happened Nike had a tougher

year where many financial ratios declined, however, the company did manage to get back strong

during 2021 thanks to some great financial decisions. In the last quarter of 2021, they had a

revenue growth thanks to higher wholesale shipments. The revenue managed to grow with 41%.

During 2021 Nike also returned about $2.3 billion of dividends to their shareholders. The

company has a strong reputation for increasing shareholder returns through dividends in order to

help the company grow (Nike, Inc. Reports Fiscal 2021 Fourth Quarter and Full Year Results,

2021) Further, during 2020 the company paid out dividends of $435 million only in the first

quarter, this is a great financial decision in order to show that they are committed to give out a

shareholder value in the long run. It also shows investors that they believe the company has a

strong financial position (NIKE (NKE) Raises Dividend, Boosts Shareholders’ Wealth, 2021)
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Before to winter 2020, the industry's North American business was completely handled itself

through the operational functions in Memphis, Tennessee. Nike said that it will not just convert

existing fulfillment centers to universal infrastructures but would also open new retail locations

in California, Pennsylvania, and Texas. In addition, to supplement its European distribution

center in Belgium, the business opened a local service department in Madrid, Spain. They were

also implementing innovative technologies, such as artificial intelligence and machine learning,

to boost distribution warehouse effectiveness. A few more measures to strengthen the industry's

distribution network were disclosed. The reason for these different financial decisions that Nike

took was with the objective of improving its supply chain and offering a better customer service

for Nike’s clients.

Comment on investment values

Pros

The advantages of investing in NIKE stock is that the company shows a growth in most

market ratios and indicates for a good financial health. Although COVID-19 affected many

businesses and rubbed the supply chain management, Nike was able to recover the following

year and increase their revenue and ratios significantly. Nike is also focusing on increasing

their dividend payouts each year, which is promising for the future. The company also show

an increased book value per share, which is a good sign since it shows a positive future for

the stock price. Looking at the debt to equity ratio, current ratio, and quick ratio it also

indicates that the company is efficient to pay their debts and has a lower risk for reaching

bankruptcy. The EPS % is also important to look at when deciding if to invest or not, for

NIKE we can see that it increased significant the last year, which means that the company
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recovered quickly after the downfall in the economy during COVID 19. Since this ratio

shows how much the company makes for each share of their stocks, Nike’s growing ratio

indicates a future growth of their stocks. The free cash flow tells us how much money the

company has left after paying their cost, and Nike has a significant growth in this ratio the

past year. When considering an investment, we should take this into consideration since it

indicates that the company might be able to pay out more dividends.

Cons

However, there are also cons of buying NIKE stocks. A growing EPS shows that

investors has to pay more for their shares. It may indicate a greater return but it also indicates

that the stocks are highly prices. The P/E ratio is also important to evaluate, because this ratio

shows the valuation of a stock and helps to determine the price of the stock in relation to how

much earnings a company has. The P/E ratio for NIKE is generally very high and, therefore,

shows that the stocks are overprices and not worth investing in. Since the ratio has grown

significantly during 2021 it means that the stock will even go higher in price. Further, the

enterprise value/EBIT and enterprise value/EBITA ratio is also very high, which means that

Nike has a stock price that is very high compared to similar stocks and is potentially

overvalued or overpriced. Most of the ratios are telling us that Nike’s stock is overvalued

and that could be an indicator that Nike wouldn’t be a great investment right now.

Investment decision

When deciding to invest in Nike it could be said that the stock price is very high, which

requires a larger investment but could also generate a great return. The company has faced

problems with supply chain management that affected their business the past years, however,

a good indicator is that Nike still managed to show growth in revenue and higher sales thanks
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to their shift to e-commerce. This would tell us that the company is able to make good

financial decisions that benefit their company’s financial health and constant growth.

Investing in Nike could, therefore, generate a great return, but its also a question if the high

stock price is worth the possible return. Investing in Nike is a higher risk, because after

analyzing many ratios it could be possible that the stocks are overvalued. As a conclusion,

we would say that investing in Nike stock can be a great win in the long run and could

generate a great return since the company is financially stable and a leading brand in their

market. However, the stock price is very high and they seem to be very overvalued, which

leads us to a recommendation of not buying their stocks right now.

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Fourth-Quarter-and-Full-Year-Results/[Link]

NIKE (NKE) Raises Dividend, Boosts Shareholders’ Wealth. (2021, November 19).

[Link]

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[Link] Staff. (2021, January 15). Why Nike Will Continue to Outperform in 2021.

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to-outperform-in-2021/
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Wikipedia contributors. (2022, November 15). Nike, Inc. Wikipedia.

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