Nike Inc. Financial Ratio Analysis

Nike Inc,. originally established in Oregon, is a leader in its industry. The company designs, develops, and markets athletic footwear and apparel. Selected industry average ratios and financial statements for Nike Inc. are provided below. Your task is to analyze the financial strengths and weaknesses of this industry leader.

Balance Sheet, May $31,2016$

$($in Thousands of Dollars$)$

Cash and equivalents

$ $119,804$ Accounts payable $ $165,912$

Accounts receivable $521,588$ Notes payable $300,364$

Inventory $586,594$ Other current liabilities $162,196$

Other current assets $52,274$ Total current liabilities $ $628,472$

Total current assets $ $1,280,260$ Long$-$term liabilities $46,869$

Net fixed assets $428,170$ Shareholder equity $1,033,089$

Total assets $ $1,708,430$ Total debt & equity $$1,708,430$

Income Statement

Year Ended May $31,2016$

$($In Thousands of Dollars$)$

Net Sales

$ $3,003,610$

Less cost of goods sold $1,850,530$

Gross profit $ $1,153,080$

Less operating expenses $664,018$

EBIT $ $489,062$

Less interest expense $27,316$

Earnings before taxes $ $461,746$

Less taxes $174,700$

Net income $ $287,046$

Industry Averages

Return on common equity: $22\mathrm{.}3\%$

Non$-$current asset turnover: $7\mathrm{.}8$

After$-$tax profit margin: $6\mathrm{.}2\%$ Average collection period: $46\mathrm{.}5$ days

Total asset turnover: $2\mathrm{.}0$ Inventory turnover: $3\mathrm{.}3$

Equity multiplier: $1\mathrm{.}8$ Current debt ratio: $30\mathrm{.}1\%$

Gross profit margin: $39\mathrm{.}2\%$ Long$-$term debt ratio: $14\mathrm{.}1\%$

EBIT margin: $10\mathrm{.}9\%$ Times$-$interest$-$earned ratio: $15\mathrm{.}1$

Before$-$tax profit margin: $10\mathrm{.}2\%$ Current ratio: $2\mathrm{.}5$

Current asset turnover: $2\mathrm{.}7$ Quick ratio: $1\mathrm{.}1$

A$)$ Apply the extended DuPont model to Nike and to its industry. Explain why Nike$$s return on equity $($ROE$)$ differs from the industry$$s$.$ What are the implications of the three determinants of Nike$$s ROE?

B$)$ Use the current ratio, quick ratio, and CCC to assess Nike$$s liquidity relative to the industry$$s$.$ Is Nike a reasonably liquid company? Explain.

C$)$ Probe for reasons that cause Nike$$s after$-$tax profit margin to differ from the industry$$s: $(1)$ Develop a common$-$sized income statement for Nike and for the industry. $(2)$ Interpret the implications of the differences in margins between the company and the industry.

D$)$ Probe for the reasons that cause Nike$$s total asset turnover to differ from the industry$$s: $(1)$ Calculate relevant asset management ratios for Nike. $(2)$ Interpret the implications of the differences in asset management ratios between the company and the industry.

E$)$ Probe for the reasons that cause Nike$$s equity multiplier to differ from the industry$$s: $(1)$ Calculate relevant debt management ratios for Nike. $(2)$ Interpret the implications of the differences in debt management ratios between the company and the industry.

F$)$ Summarize Nike$$s financial strengths and weaknesses.