Ratio Performance Trends
Profitability, liquidity, debt management, asset management, and per share ratios are indicators of a business’s wellbeing. The performance ratios analyzed belong to Nike Company and are for the years 2019, 2020, and 2021. Profitability ratios show how well a company is utilizing its assets to create value and generate profits for shareholders. Nike’s return on assets (ROA) ratio was 17.42 in 2019, declined to 9.2 in 2020, and rose to 16.58 in 2021 (Mergent, 2021). The return on equity (ROE) ratio was 42.74 in 2019 but fell to 29.62 in 2020 and increased to 55.01 in the current year. The return on investment (ROI) ratio began at 37.11 in 2019, reduced to 19.63 in 2020, and rose to 34.71 in 2021 (Mergent, 2021). Therefore, profitability ratios recorded a significant decline in 2020 but have recovered in the current financial year.
Quick and current ratios are known as liquidity ratios because they measure whether a business can pay its current debts without external resources. Throughout the three years, Nike’s quick ratio moved from 1.14 to 1.39 and closed with 1.85, indicating steady growth. The current ratio also recorded rising values every year, beginning with 2.1 in 2019, followed by 2.48 in 2020 and 2.72 in 2021 (Mergent, 2021). Liquidity ratios for the company have registered increases in all the three years under analysis.
Debt management ratios reflect a business’s percentage of debt relative to other financing options. The long-term debt to equity ratio increased in 2020 from the previous year’s 0.38 to 1.17 but dropped to 0.74 in the next year. The total debt to equity ratio followed a similar trend, moving from 0.38 to 1.12 and falling to 0.74 in 2021 (Mergent, 2021). Interest coverage has declined every year since 2019, from 98.98 to 33.44 and 26.42. Therefore, Nike’s financial leverage has declined in the three years of analysis.
Asset management ratios demonstrate a company’s ability to use assets in creating revenue. Total asset turnover has dropped every year since 2019 from 1.69 to 1.35 in 2020 and 1.29 in the current year. Receivables turnover has increased annually from 10.07 in 2019 to 10.63 and 12.35 in 2020 and 2021, respectively (Mergent, 2021). Inventory turnover fell from 3.98 in 2019 to 3.26 in 2020 but rose to 3.46 this year. Accounts payable turnover followed a similar trend falling from 16 to 15.35 in 2020 and rising to 17.52 in 2021. Book value per share slightly decreased from 5.77 to 5.17 between 2019 and 2020 but increased to 8.09 this year (Mergent, 2021). There is no uniform movement in the asset management ratios for the three years.
Interpretation of Ratio Trends
Table 1: Nike’s Performance Ratios Interpretation.
Under profitability ratios, ROA and ROI declined from 2019 to 2021 while ROE increased. Both quick and current ratios increased in the same period. Long-term debt and total debt to equity ratios also recorded an increase but interest coverage declined. Total asset and inventory turnover ratios declined while receivables and accounts payable turnover ratios increased. Book value per share recorded an increase during the analysis period.
Nike’s performance is weak as shown by the distribution of scores across the 13 ratios in Table 1. Five out of the 13 ratios have a positive change resulting in to increase in the company’s strength. However, eight ratios contribute to Nike’s weaknesses, leading to the business’s overall weakness. All the debt management ratios have declined since 2019, negatively affecting the company’s performance. Liquidity ratios have improved over the three years but the declining ratios outweigh this strength. Four of the turnover ratios analyzed lead to a neutral impact as two of them improved while the others declined. This neutrality is offset by debt management ratios, book value per share, and profitability ratios that recorded only one improvement against six declines.
Performance against Industry Competitor Ratios
Table 2: Nike’s Performance against Industry Average.
Nike has higher values for profitability ratios, namely ROA, ROE, net profit, and gross margins. The difference is greatest for the ROE ratio followed by ROA and net margin. Nike’s liquidity ratios, quick and current, are slightly higher than those of the industry average. The long-term debt to equity ratio for the industry average is missing but the company has lower values for other debt management ratios. Nike also recorded higher turnover ratios in 2021 compared to the average.
Nike’s Overall Financial Performance
Nike’s performance as depicted in Table 2 is better than the industry average. Higher liquidity and profitability ratios show that Nike is outperforming most companies in its industry. In addition, asset and inventory turnover are higher than average, pointing to better performance in the turnover ratios. Lower debt management ratios indicate a healthy debt portfolio for any business. Therefore, Nike is better than the industry average for these ratios because its total debt to equity ratio is below that of the competitor average. Nevertheless, Nike’s interest coverage is worse than the industry’s mean since it is lower. Overall, Nike has performed better in the most important ratios that fall under liquidity, turnover, profitability, and debt management.
Reference
Mergent, Inc. (2021). Nike Inc. data report. Web.