Financial Analysis of Adidas Company - Case Study Example

FINANCIAL ANALYSIS OF ADIDAS S.No Particulars ADIDAS     2009 2008 2007 I MARKET PERFORMANCE RATIOS         Net Tangible Assets per Share 11.58 9.05 7.54   Earnings Per share 1.24 3.21 2.64 II PROFITABILITY RATIOS         Return on Equity (ROE) 6.50 18.96 18.23   Gross profit Margin (%) 45.39 48.67 47.40   Operating Profit Margin 4.89 9.91 9.21   Net Profit Margin 2.36 5.94 5.38           III WORKING CAPITAL MANAGEMENT         Rate of Inventory (in days) 95.00 131.00 110.00   Debtors Collection Period (in days) 50.00 55.00 52.00   Creditors Payment Period (in days) 75.00 80.00 57.00 IV LIQUIDITY RATIOS         Current Ratio 1.58 1.35 1.58   Quick Ratio 1.06 0.81 0.96 V ASSET MANAGEMENT         Asset Turnover Ratio 1.17 1.13 1.24   Return on Assets(ROA) 5.59 11.35 11.78 VI GEARING RATIOS         Debt to Equity Ratio (%) 41.67 52.45 64.83   Debt Ratio (%) 57.51 64.48 63.69   Equity Ratio (%) 42.49 35.52 36.31   Interest Coverage Ratio 3.01 5.30 5.60 I. TRADING OUTLOOK STRATEGY: 1. Net tangible Assets per share: The Net tangible assets per share of ADIDAS are at €7.54 at 2007, which has improved to €9.05 at 2008. The Net tangible assets per share has further improved to €11.54 as at 2009. Thus, the net tangible assets per share has recorded an increase of about 53% increase in a span of three years. 2. Earnings per Share: The Earnings per share of ADIDAS is €2.64 per share as at 2007 and the same has increased to €3.21 per share as at 2008. The earnings per share ahs come down to €1.24 per share as at 2009. Although the ratio has come down it is still within the acceptable norms. The decrease in Earnings per share is due to increase in number of shares due to fresh infusion of capital. 3. Dividend per share: The Dividend per share of ADIDAS is €0.50 as at 2008 and the same has slightly come down to €0.35 dollars per share as at 2009. Although the ratio has come down it is still within the acceptable norms. Trading outlook from the point of view of short term investor would be to quit the company at this point as the company’s profitability has reduced and the dividend payout has also decreased. However, from the point of view of long term investor, the company still has good potential and there is chance for recovery and hence he can wait for another quarter by putting some stop loss criteria. II.PROFITABILITY 1. Return on Equity(ROE): The ROE of ADIDAS is 18.23% for the year 2007 and the same has remained at the same level of 18.96% for the year 2008. The ROE has decreased drastically to 6.50% as at 2009 due to substantial fall in the profitability of the company in the year 2009. This ratio is calculated considering the Closing equity. The ratio also indicates the efficiency with which the company has used its resources to generate profit. Thus the company’s financial performance has substantially decreased compared to the previous year. Equity Shareholders of the company are the main interest group who would like this ratio to be at a high level and improving year after year. This ratio is also considered by Prospective investors in making their decision to invest in the company. 2. Gross profit Margin The Gross profit Margin of ADIDAS is 47.40% for the year 2007 and the same has increased marginally to 48.67% for the year 2008. The Gross Profit Margin has slightly decreased to 45.39% for the year 2009. This ratio looks at how well a company controls the cost of its inventory and the cost of manufacturing its products. The higher the gross profit margin the better the profitability of the company. The Gross Profit Margin of ADIDAS is in the acceptable range. 3. Operating Profit Margin The Operating Profit Margin of ADIDAS is 9.21% for the year 2007 and the same has slightly increased to 9.91% for the year 2008. However, the Operating Profit Margin has drastically fallen to 4.89% for the year 2009. Thus, the operating cost of the company has increased to a large extent during the year 2009. The Operating Profit Margin of ADIDAS is very low compared to that of the industry average. 4. Net profit Margin The Net profit Margin of ADIDAS is 5.38% for the year 2007 and the same has marginally increased to 5.94% for the year 2008. The Net Profit Margin has decreased considerably to 2.36% for the year 2009. The net profit margin shows how much of each sales dollar turns up as net income after all expenses are paid. The Net Profit Margin of ADIDAS is very low compared to that of the industry average. The Profitability of the company has decreased drastically, which is a concern and the company needs to closely monitor its operating costs. III.WORKING CAPITAL MANAGEMENT: 1. Rate of Inventory: Inventory turnover (in days) of ADIDAS is about 110 days for the year 2007 and it has gone up to 131 days for the year 2208. However, Inventory turnover has come down to 95 days for the year 2009 which is optimum level of inventory. From this ratio we can calculate the number of times inventory is rotated in a year. ADIDAS is rotating the inventory for 3.32 times (365 days/110 days) for the year 2007 and the same has improved to 3.84 times (365days/95days) for the year 2009. Days inventory turnover indicates the briskness of the business and also the efficiency with which the company is able to manage its inventory. Lower Days inventory does not always mean better management efficiency. The lower days inventory should not result in stock out situation, in which case there is a chance of loosing the customer and is an inefficient management. Further, Appropriate days inventory ratio varies from Sector to Sector. In case of diversified business days inventory ratio should be calculated for each segment separately and it should be compared with the respective industry standards. For example Infrastructure business would have a higher days inventory ratio due to long production cycle. 2. Days Debtors: Debtors Turnover (in days) of ADIDAS is about 52 days for the year 2007 and it has increased to 55 days for the year 2008. Debtors collection period has come down to optimum level of 50 days for the year 2009. From this ratio we can calculate the number of times debtors is rotated in a year. ADIDAS is rotating the debtors for 7.02 times (365 days/52 days) in a year 2007 and the same has improved to 7.30 times (365 days/50days). Increases in debtor days may be a sign that the quality of a companys debtors is decreasing. This could mean a greater risk of defaults (so it does not get paid at all). It could also be an indicator that cash flow is likely to weaken or that more working capital will be required (Moneyterms.co.uk, Unknown). The higher the value of debtor’s turnover (in times) the more efficient is the management of debtors and more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. 3. Payables payment period: Payables payment period (in days) of ADIDAS is about 57 days for the year 2007 and it has increased to 80 days for the year 2008. Payables payment period has come down slightly to 75 days for the year 2009. Increase in payables period would increase the current liabilities and hence the current ratio would be low. Although payables period differs from industry to industry increase in the period over the years is not a good sign. The working capital position of the company is good as of now but there is scope for improvement. A further dip in profitability would definitely effect its Working capital position too. IV.LIQUIDITY: 1. Current Ratio: The current ratio of ADIDAS is at 1.58 as at 2007 and the same has come down to 1.35 as at 2008. However, the current ratio has gone back to the previous level of 1.58 as at 2009, which is a good sign. Current ratio represents the liquidity position of the company. In General, the current ratio below 1 means the liquidity position of the company is not good. One drawback of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have uncertain liquidation values. A higher current ratio signifies good liquidity position. Current ratio less than 1 shows that current liabilities of the company are more than its current assets, which means the working capital of the company is negative. Likewise, current ratio should not be too high as this could be due to huge stocks piled up, Long outstanding receivables, which is not again a good sign. Thus, optimum current ratio differs from sector to sector but ideally the ratio should be greater than 1. 2. Quick Ratio: One of the problems with the current asset ratio is that current assets include stocks which may or may not be quickly sold (or which may only be sold quickly at a lower price). The quick assets ratio is also known as the acid test ratio. This name is used because it is the most demanding of the commonly used tests of short term financial stability. The quick asset ratio of ADIDAS is at 0.96 as at 2007 and the same has decreased to 0.81 as at 2008. The Quick asset ratio has improved drastically to 1.06 as at 2009. Thus, liquidity position of ADIDAS is good. 10. Cash flow Ratio: The cash flow ratio of ADIDAS is at 0.14 as at 2008 and the same has improved to 0.42 as at 2009. A higher Cash flow ratio means the companies current liabilities are covered to a greater extent; hence a higher ratio signifies better liquidity position. Ideally the cash flow ratio should not be less than 1. Cash flow ratio being less than one means the net cash generated from operating activities during the year is not enough to cover the current liabilities as at the year end and the company needs to raise money to meet its current liabilities. As with other liquidity ratios the appropriate level of cash flow ratio differs from sector to sector. It is a better measure of liquidity than the current ratio as it is comparing current liabilities with the realized values of current assets, i.e. net cash from operating activities. Often current assets may comprise inventory which cannot be sold or debtors which cannot be realized. These are not considered while calculating cash flow ratio and hence it is a better measure of liquidity. Further, Current ratio measures liquidity by taking into account the balance sheet values of current assets as on the balance sheet date where as cash flow ratio takes into account cash generated over an accounting period. The liquidity position of the company is good but it needs to improve its cash flow position. V.ASSET MANAGEMENT: 1. Return on Assets (ROA) The return on Assets of ADIDAS is 11.78% for the year 2007 and the same has almost remained at the same level at 11.35% for the year 2008. The return on assets has further decreased to 5.59% for the year 2009 due to drastic fall in the profitability of the company in the year 2009. During the year 2009 the company has purchased assets to the tune of €240 millions which may not have started generating income, which has also resulted in decrease in ROA. This ratio is also referred to as Return on Investment. The sources of funds obtained either through debt and or equity are invested in acquiring assets. ROA depicts how effectively the management has invested the procured funds to earn a higher net income. It measures the amount of profit earned relative to the firms level of investment in total assets. It is better to have higher percentage, which implies that the company is doing a good job in using its assets to generate sales. The higher the ROA number, the better, because the company is earning more money on less investment. The ratio aims at measuring the efficiency with which the assets are utilized to generate income to the company. Interest is a financial commitment and is not related to generating income from the assets; hence the interest cost is added back to the net income. Likewise the tax paid is a statutory commitment and is not an expense incurred in generating the income. Thus, taking EBIT for calculating this ratio would show correct results. 2. Asset Turnover Ratio: This ratio is useful to determine the amount of sales that are generated from each dollar of assets procured. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. A low asset turnover ratio means inefficient utilization or obsolescence of fixed assets, which may be caused by excess capacity or interruptions in the supply of raw materials. The asset turnover ratio of ADIDAS is at 1.24 times for the year 2007 and the same has marginally come down to 1.13 times for the year 2008. However, the asset turnover ratio has improved slightly to 1.17 for the year 2009. It is evident from the above that ADIDAS needs to rotate its assets more often to improve its profitability. VI.GEARING: 1. Debt to equity ratio: The Debt to equity ratio of ADIDAS is at 64.83% as at 2007 and the same has slightly come down to 52.45% as at 2008. The Debt to equity ratio has further come down to 41.67% as at 2009. This ratio is also called gearing ratio and is closely followed by Creditors and investors to know to what extent the company is willing to use debt to fund its investments. Since, the ideal debt to equity ratio would be 66.67%; the company can enjoy the benefits of leverage by increasing its debt. 2. Debt ratio: The Debt ratio of ADIDAS is at 63.69% as at 2007 and the same has remained at about the same level as at 2008. However, the Debt ratio has come down to 57.51% as at 2009. 3. Equity Ratio: The Equity ratio of ADIDAS is at 36.31% as at 2007 and the same has remained about the same level as at 2008. The equity ratio has further improved to 42.49% as at 2009. The improvement is on account retention of profits in the business and infusion of fresh capital during the year. 4. Interest Coverage Ratio: The interest coverage ratio of ADIDAS is at 5.60 as at 2007 and the same has slightly come down to 5.30 as at 2008. The interest coverage ratio has further come down to 3.01 as at 2009. The interest coverage has decreased due to drastic reduction in the profits in the year 2009. General acceptable benchmark for this ratio is that it should not be below 3 and the ratio is just above 3 and hence financial risk of the company is within the acceptable norms. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. Reference List: 1. ….Debtor days, viewed on 07th April, 2010,< http://moneyterms.co.uk/debtor_days/> Read More