Adidas Group’s Financial Statement Analysis

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About the company

Adidas Group is a multinational company that is based in Germany. The company was established in 1924 and it has grown tremendously over the years. At the moment, it has a presence in over 160 countries across the globe (Adidas Group 1). The Group is a public entity that is listed on Frankfurt Stock Exchange with the ticker symbol ADS. Besides, it has a secondary listing on OTC Markets Group with the ticker symbol ADDYY. The company operates in the apparel and accessories industry. Specifically, it deals with the design, production and sale of sports shoes, clothing and other accessories.

The products that are manufactured by the company complement each other. In terms of the global market share, the company comes in second after Nike, Inc. At the end of 2014, Adidas Group employed 53,731 people in all its outlets (Adidas Group 1). The number grew to 55,555 at the end of 2015. The 2014 statistics show that the company manufactured more than 660 million products.

Further, total sales amounted to €16.915 billion at the end of 2015 (Adidas Group 1). This was an increase from €14.5 billion that was reported in 2014. The Group comprises 5 brands. Besides, it has four subsidiaries. Each subsidiary focuses on the production of each brand. The subsidiaries are Reebok, Runtastic, TaylorMade-Adidas, and Ashworth (Adidas Group 1). The paper seeks to carry out ratio analysis of the Adidas Group.

Ratio analysis

The success of a business requires effective planning and financial management. However, the reported financial statements of Adidas Group do not give an in-depth analysis of the strengths and weaknesses of the entity. Therefore, it is necessary to carry out a comprehensive financial analysis of the statements using various tools such as ratio analysis. Ratio analysis helps various stakeholders to make informed decisions because it breaks down the data into various components for a better understanding of the financial results and trend of the company. Some of the common categories of ratios are liquidity, profitability, leverage, efficiency and investment ratios among others. These ratios measure different attributes in the financial health of a company. This section will discuss the key categories of ratios for the Adidas Group.

Liquidity ratios

Liquidity ratios show the ability of an organization to maintain positive cash flow while satisfying immediate obligations, that is, the availability and adequacy of current assets to pay current obligations (Fridson and Alvarez 71).

Formula 2014 2015 Change
Current ratio Current assets / current liabilities 7,347 / 4,378 1.68:1 7,497 / 5,346 1.4:1 -0.28
Quick ratio (Current assets – inventory) / current liabilities (7,347 – 2,526) / 4,378
(7,497 – 3,113) / 5,346

(Source of data – self generated).

The current ratio dropped by 0.28 points while the quick ratio dropped by 0.21 points. The decline shows that the ability of the company to meet the short-term obligations using current assets declined. This indicates that the liquidity position and the financial health of the company deteriorated. The decline also shows that the effectiveness of the company in managing working capital deteriorated. Further, the quick ratios for the two years were less than 1. This indicates that the liquid assets of the company (excluding inventory) cannot cover the immediate obligations. Thus, the company cannot pay the current obligations without selling inventory. A decline in the liquidity ratios may also limit the ability of the company to attract new short-term capital (Fridson and Alvarez 89).

Asset management ratios

This category of ratios focuses on the internal operations of the company and the level of activity. That is, how well the Group manages resources to generate sales (Fridson and Alvarez 94).

Formula 2014 2015 Change
Receivables turnover (times) Sales / accounts receivables 14,534 / 1946


16,915 / 2,049


Days sales outstanding 365 / receivables turnover 365 / 7.74


365 / 8.47


Inventory turnover (times) Cost of goods sold / ending inventory 7,610 / 2,526
8,748 / 3,113
Days inventory 365 / inventory turnover 365 / 2.95
365 / 3.1
Payables period 365 * ending accounts payable / Cost of goods sold 365 * 2526 / 7,610


365 * 3,113 / 8,748


Cash conversion cycle (days) Days inventory outstanding + days sales outstanding – days payable outstanding 47.15 + 123.75 – 83.38


+ 117.64 – 76.69


Fixed asset turnover (times) Sales / net fixed assets 14,534 / 5,070
16,915 / 5,846
Asset turnover (times) Sales / total assets 14,534 / 12,417
16,915 / 13,343

(Source of data – self generated).

The receivables turnover ratio grew by 0.73 points during the two-year period. This ratio gives information on the number of times accounts receivables is collected during the year. An increase in the value of the ratio shows that the period between credit sales and collection of receivables reduced as indicated by the drop in the day’s sales outstanding by 4.05 points. These two ratios show an improved efficiency in the handling of accounts receivables. This has a positive impact on the working capital and liquidity of the company (Fridson and Alvarez 75). The inventory turnover grew by 0.15 points.

This shows that frequency with which inventory is converted into sales improved in 2015. It can also imply that the rate at which the company reorders inventory improved. This explains why the day inventory dropped by 6.11 points. The ratio gives information on the purchasing efficiency of the company. The drop in day’s inventory shows that the inventory is held by the company for a shorter duration. This indicates that the efficiency in the management of inventory improved. This has a positive impact on working capital and profitability (Fridson and Alvarez 99).

The payable period dropped from 83.38 in 2014 to 76.69 in 2015. This indicates that the accounts payable turnover improved. This shows that the company takes a shorter period to pay the creditors. It is worth mentioning that the days in accounts payable highly depends on the credit terms of the supplier. A decline in days’ accounts payable helps in improving the relationship between the company and the creditors. However, it has a negative impact on the working capital. Cash conversion cycle is an important ratio that gives information on the duration it takes a company to convert various inputs into cash flows (Fridson and Alvarez 102).

Thus, it reveals how long the factors of production are tied into the manufacturing process before cash is received after the sale. The three main components of the cash conversion cycle are inventory, accounts receivables, and payment period. Cash conversion cycle dropped by 3.46 points in 2015. This shows that the company takes a shorter duration to convert the various inputs into cash. The decline is an indication of improved efficiency. The fixed asset turnover and the asset turnover gained 0.14 points and 0.1 points respectively.

The two ratios give information on how the company makes effective use of the assets to generate sales. The increase shows that the efficiency in use of assets improved over the period (Fridson and Alvarez 131). Analysis of the asset management ratios shows that the overall efficiency of the Adidas Group improved in 2015. This has a direct positive impact on the profits.

Debt ratios

A company’s gearing is explained by the amount of debt financing it holds. The ratios are vital since they show the extent of exposure of equity financing. A commonly used ratio is the debt to equity ratio (Deegan 349).

Formula 2014 2015 Change
Debt to equity Total debt / total equity (288 + 1,584 ) / 5,618
(366 + 1,463) / 5,648
Interest coverage (times) Earnings before interest and taxes / interest expense 883 / 67
1,059 / 67

(Source of data – self generated).

The debt to equity ratio dropped by 0.02 points in 2015. This can be attributed to an increase in equity and a decline in debt. The decline shows that the amount of debt in the capital structure of the company declined. A decline in debt ratio is favorable because it enables the company to attract new capital. Further, it also increases the shareholders’ fund because the profit that is attributed to the shareholders will increase as a result of a decline in interest expense. Further, it can also be observed that the values of the ratio were low.

This shows that the proportion of equity higher than that of debt. This indicates that the company has a great potential of borrowing and growing the business. Therefore, the company has a low leverage level. The interest coverage ratio improved by 2.01 points (Fridson and Alvarez 119). The ratio gives information on the ability of the company to make interest payments using operating income. The values of the ratios are high and it shows the company is able to generate adequate cash flow that can pay interest expense. The ratio shows that the company is solvent.

Profitability ratios

Profitability ratios give an indication of the earning ability of the Group. The ratios measure the effectiveness of a company in meeting the profit objectives, both in the long and short run.

Formula 2014 2015 Change
Gross margin (%) Gross profit / sales 6,924 / 14,534
8,168 / 16,915
Operating margin (%) Operating income / sales 883 / 14,534
1,059 / 16,915
Net margin (%) Net income / sales 496 / 14,534
640/ 16,915
Return on assets (%) Net income / total assets 496 / 12,417
640 / 13,343
Return on Equity (%) Net income / equity 496 / 5,618
640 / 5,648

(Source of data – self generated).

The gross profit margin improved by 0.65 points. This ratio shows the amount of profit without taking into account the indirect costs of the business. An improvement in the value of the ratio shows that the company is effective in managing selling price of the products and the direct costs (McLaney and Atrill 191). The higher value of the ratio also shows that the company has an adequate gross profit that can cover the indirect costs. The operating margin grew by 0.18 points. This ratio gives information on the profitability of the main activities of the Group. The values of the ratio were low. The net margin grew by 0.38 points. The ratio shows the amount of profit that is generated from both operating and non-operating activities of the business. A growth in the value of the ratio shows that the company is efficient in managing the costs of the business.

The growth also shows that the sales improved in 2015 and the costs were efficiently managed. The value of return on assets increased by 0.84 points in the year 2015. This implies that the ability of the company to turn the assets into profit improved. This shows an improved efficiency in the use of assets (Weygandt, Kieso and Kimmel 391). This ratio is important because effective use of assets can help a company to gain a competitive advantage in the industry. The ratios of return on equity of the company were high and they improved.

This ratio is important to an investor because it shows the amount of profit that the company can generate to compensate for the risks that are associated with investing in the company. The overall profitability of the company was low. This can be attributed to the high cost of operation (Fridson and Alvarez 120). However, there was an improvement in the profitability ratios.

Market value ratios

These ratios show the performance of the shares of the company.

Formula 2014 2015 Change
Price-to-earnings Market value per share / earnings per share 57.62 / 2.67
89.91 / 3.37
Price-to-book The market value per share / book value per share 57.62 / 18.21
89.91 / 15.61
Share price 57.62 89.91

(Source of data – self generated).

The price-to-earnings ratio of the company grew by 5.1 points. The increase shows that the earning of the company is likely to grow in the future. Therefore, the shareholder is paying more for the expected high earnings in the future. The price-to-book ratio grew by 1.2 points. The ratio compares the share price of the stock to the book value of the entity. An increase shows that the value shareholders are paying for the net assets of the company improved (Brigham and Ehrhardt 291). Therefore, the overall valuation of the company improved in 2015. This contributed to the increase in share price.

Interrelationship of the ratios and summary

The discussion above shows that a change in one ratio affects other ratios. For instance, the growth in profitability of the company is caused by the improved efficiency and a decline in debt ratios. Further, a decline in payable period can lead to the decline in liquidity ratio. Also, the increase in profitability leads to improvement of solvency. Finally, the increase in market value of the company is caused by the decline in debt to equity ratio, growth in asset management ratios, and profitability. In summary, it can be noted that the Adidas Group has a sound financial position. Besides, the financial performance of the company improved in 2015.

Works Cited

Adidas Group. Profile. 2016. Web.

Brigham, Eugene and Michael Ehrhardt. Financial Management Theory and Practice, Boston: South-Western Cengage Learning, 2009. Print.

Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.

Fridson, Martin, and Fernando Alvarez. Financial Statement Analysis: A Practitioner’s Guide, New York: John Wiley & Sons, 2011. Print.

McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times/Prentice Hall, 2008. Print.

Weygandt, Jerry, Donald Kieso, and Paul Kimmel. Financial Accounting, London: John Wiley & Sons Ltd, 2009. Print.

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