ANALYSIS OF NIKE 1

Introduction

Nike is a global leader in the field of manufacturing of sports attire and sporting shoes. The company has received global acclaim due to quality, durability and affordability of its products. Due to the search for cheap labor, the company has faced negative press due to allegations of child labor in some of its operations outside of the United States. Moreover, in its supply chain, the company has faced concerns on oppressing of suppliers. Nonetheless, the company has weathered these challenges to continue performing its duties as a going concern. Leadership, which is a major contributing factor to the success of a company, Nike has over the time changed its leadership to be incongruence with its goals and objectives (Mainwaring 2011). In the company’s production and leadership models, the company adopted actions that has led to the massive growth in the company’s capabilities.

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Corporate Social responsibility is a contemporary issue in many firms globally. Nike has developed a culture of CSR where it relates more with the society and its environs. Nike’s CSR has a unique way of protecting the environment through control of its supply chain leading a great marketing strategy (Mainwaring, 2011). Over the years, Nike has spent millions of dollars supporting the society and its immediate employees. In the company’s operations CSR is imperative to its growth hence having in place a CSR policy and strategy framework (Soares, E. T. P, 2016). However, despite the CSR policy being in place, the company has a quite bad history in its corporate behavior with issues of cheap labor.

Competition has grown globally in the production of sporting apparels. However, due to the leadership and the continuous improvement in Nike’s products, has given the company a competitive age over the competitors. Moreover, with adoption of technology, the company has invested heavily on online marketing strategies. Additionally, the company has reduced the mortar stores it has to online business where clients can request products online. Moreover, the sponsorship of Olympics and other games has given Nike a mileage of its products with almost all sports people having a product from the company.

Taste, choice and preference is a changing unseen variable that affects many businesses around the globe. Nike has flexibility in its operations where it listens to its customers and producers such products that meet the customer expectations (Kramer, 2019). Also, as the global trend for sports change and more games are internationalized, Nike has ensured that it has products that match the demand and also the world expectations. For instance, despite the different countries in the world, sporting equipment are universal and hence a major boost to Nike.

EVA ANALYSIS

EVA = NOPAT – (invested capital *WACC)

;NOPAT =Net operating profit after deduction/ payment of taxes

; Invested Capital = debt+ capital leases + shareholder’s equity

;WACC = Weighted average cost of capital is 6.55%

WACCE / (E + D)Cost of EquityD / (E + D)Cost of Debt(1 – Tax Rate)
0.96226.77%0.03781.0792%(1 – 14.065%)
6.55%

(Nike, 2020).

NOPAT calculation
US$ in millions
12 months ended:May 31, 2020
Net income2,539
Deferred income tax expense (benefit)(380)
Increase (decrease) in allowance for uncollectible accounts receivable184
Increase (decrease) in equity equivalents(196)
Interest expense151
Interest expense, operating lease liability81
Adjusted interest expense232
Tax benefit of interest expense(49)
Adjusted interest expense, after taxes183
Interest income(62)
Investment income, before taxes(62)
Tax expense (benefit) of investment income13
Investment income, after taxes(49)
Net operating profit after taxes (NOPAT)2,477

(Nike, 2020).

Invested Capital

Nike Inc.
Invested capital calculation (financing approach)
US$ in millions
 May 31, 2020
Current portion of long-term debt3
Notes payable248
Long-term debt, excluding current portion9,406
Operating lease liability3,358
Total reported debt & leases13,015
Shareholders’ equity8,055
Net deferred tax (assets) liabilities(732)
Allowance for uncollectible accounts receivable214
Equity equivalents(518)
Accumulated other comprehensive (income) loss, net of tax56
Adjusted shareholders’ equity7,593
Construction in process(1,086)
Short-term investments(439)
Invested capital19,083

(Nike, 2020).

EVA= 2,477 – 8.96% × 19,083 = 767

Free cash flow;

=cash flows from operations + capital expenditure

=2485 + (-1086)

= 1399

Nike’s Return on Assets (ROA)

= Net Income/ Average total assets

Net income = ($3.428B)

ROA= 11%

Return on Equity (ROE)

=Net Income ($3.428b)/ (Average Equity over period ($10.488b)

=32.7%

ROE is a financial ratio that measures a company’s financial performance whereas ROA measures the return on investment through profitability. From the financial analysis, Nike is projected to grow and the company is within safe margins. For instance, the REO at 32.7% is a good indication of wealth creation for the shareholders. Also, the company can meet its financial requirement to cater for day-to-day operations. Consequently, the firm requires a check on the growing debt.

References

Kramer, M. (2019). How Nike Will Keep Sales Surging As Global Economy Slows. Retrieved 10 September 2019, from https://www.investopedia.com/nike-s-digital-revival-may-pave-the-way-for-big-sale-growth-in-2019-4587432

Mainwaring, S. (2011). How Nike Redefines Leadership in a Global, Social Community. Retrieved 10 September 2019, from https://www.fastcompany.com/1715007/how-nike-redefines-leadership-global-social-community

Nike. (2020). NIKE, Inc. – Investor Relations – Investors – News, Events and Reports. Retrieved 29 March 2021, from https://investors.nike.com/investors/news-events-and-reports/default.aspx

Soares, E. T. P. (2016). Closing the ‘CSR gap’through a successful CSR strategy: insights from Nike Inc (Doctoral dissertation).

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